Investors who think they know what they are getting when they buy actively managed mutual funds had better look beyond each fund’s name, a new study indicates. Many stock funds use the terms “value” and “growth”in their names, indicating their particular investment leanings. However, over the last five years as the bear market changed the investment landscape, the differences between value and growth funds have diminished, found Morningstar Inc., an independent mutual fund rating service.
Morningstar’s analysts looked at the changes in composition of the average growth and value fund from 1990 through 2003, and also looked at valuation data on funds from 1998 to the present. “We found that the stark style differences that appeared during the height of the bubble in 1999 and 2000 have unwound a bit and that the average large-growth and large-value portfolios share more in common than they did several years ago,” wrote Morningstar’s Brian Portnoy.
The Morningstar study found that back in 1999, at the height of the bull market, there was no overlap between the top 20 stocks owned by the typical growth fund and the typical value fund. Growth funds typically held the stocks of companies whose sales and profits were growing rapidly, such as Microsoft, Cisco Systems, and Home Depot. Value funds held more stodgy stocks that were priced cheaply in relation to their earnings, such as Bank of America and Kimberly-Clark.
Also, the average valuations of stocks held by the two types of funds were quite different. The price to earnings ratios of the typical growth fund was 43, compared to 26 for the average value fund. Today those valuations have converged. The average value funds P/E ratio is 22, and the average growth fund’s is 29.
Investors who want to invest in a specific way should explore the investment style and consistency of their actively managed mutual funds and not rely on name differences alone, Morningstar says. As an alternative, index and asset-class funds that invest solely in different parts of the markets may offer a purer play on investment styles for most investors.
