Growth Shares Outperform Value Stocks as Europe's Problems Grow

Growth stocks include firms whose earnings are likely to rise, and?are chosen by investors based on the assumption that a firm that can grow its earnings rapidly should see its stock price rise faster than average. Value stocks are generally seen as those that have fallen out of favor in the marketplace, and are bargain priced compared to book value.

Value and growth are two fundamental approaches to stock investing. While some money managers combine both approaches, growth and value investment styles fall in and out of favor. Standard & Poor?s 500 Growth and Value Indices for the 30-year period ended in 2010 show that growth and value stocks have taken turns leading and lagging.

?European growth stocks as defined by MSCI have outperformed European value stocks by 8% [in about six months], which brings the three-year outperformance to 28%,? Fitch said in a statement on June 8. ?Interestingly, while most investors do not expect positive returns from equity investments, European growth stocks have managed to deliver positive returns (+3%) over the past two years, unlike the broad MSCI Europe index and the value index (down 12%).?

Aymeric Poizot, managing director at Fitch?s Fund and Asset Manager Rating Group, said the performance difference is explained by ?structural trends at play. Fitch previously identified four critical factors that have a direct implication for stock-picking: low growth prospects, the sovereign crisis, globalisation and disruptive innovation. In this context, quality growth remains a scarce asset, while value managers are threatened by ?value traps?, i.e., stocks stuck at a discounted price.?

Montreal-based Wutherich & Co., a fund management company, believes growth stocks pay off in the long term. Wil Wutherich, president of the company, said he looks for stocks with the ?right growth at the right price.? His portfolio, which has grown 15 percent a year since it started in 2001, is focused on Canadian stocks, most of them in the industrial sector, followed by energy, drilling services, suppliers to resource markets, and consumer and healthcare services.

In May for example, while the S&P 500 fell 6 percent, the Dow Jones fell 5.8 percent, and the Nasdaq declined 7.2 percent, Wutherich & Co.?s composite was down only 1.3 percent.

?When the headlines seem all bad, as they do now about Europe and the global economy, we go back and look at the fundamentals of the companies that we invest in,? Wutherich said. ?Free cash flow growth is the most important. It?s all about going back to the fundamentals and looking at balance sheets.?

John Waggoner recently reported for USA Today?that?when it comes to value or growth investing, the strategies are not always so cut and dried. Some growth managers do not believe in paying too high a price for a stock, and most value managers do not just buy cheap stocks with no growth prospects.

Waggoner wrote that one ?could argue that growth and value managers simply swap stocks. Growth managers buy the stocks on the way up; value managers buy on the way down. It?s the financial Great Circle of Life.?

Microsoft?(NASDAQ:MSFT), for example, one of the great stocks of the late 1990s boom in growth stocks, now resides in the portfolios of many great value funds. Since the bull market started in March 2009, growth funds are on top.

?Is it time to jump on the growth train?? Waggoner asked. His answer: ?It really depends on which style is in favor on Wall Street. Had you invested in one of the biggest large-company growth funds in 1979 and sold 20 years later ? a long-term investment by any definition ? you would have earned 3,072%, versus 1,944% for a similar large-company value fund. Ten years later, the results are different, to say the least. An investment in a value fund 20 years ago would have gained 303% ? and a growth fund would have returned 216%.?

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Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.

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