After Being Hammered, Growth Beat Value Stocks

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

For the first time in a long while, growth stocks are outperforming value stocks. This may not seem like a big deal to you, but for managers running large-cap growth funds, it’s like coming home after a particularly tedious journey.


Elizabeth Bramwell, head of growth stock firm Bramwell Capital Management, says it all: “It’s been a horrible five years.” Her counterparts at Putnam, Fidelity, or T. Rowe Price would no doubt agree. Most growth managers were hammered by the collapse of the tech bubble in the early years of this decade and have struggled to find their way since.


For Ms. Bramwell, who came to prominence running Mario Gabelli’s highly successful growth fund in the late 1980s, poor performance followed many years of outstanding returns. Her stumbling block was a collapse in hospital and managed care stocks like Tenet Healthcare (THC $8) in late 2002. For better or worse, she never fully engaged with Internet stocks.


Happily, her toughest comparisons are nearly behind her,and recent results have been much improved. In the most recent quarter her large-cap growth stock fund was ahead 5.1%, bringing her to a gain of 2.8% for the year.


Ms. Bramwell started her own fund in 1994, and then founded a second, the highly concentrated Focus Fund, in 1999. Both funds are accorded an overall rating of three stars by Morningstar. For five and 10 years, her main growth fund earns coveted four-star status.Her three-year performance for both funds, however, is only given one star.


Today, Ms. Bramwell believes a renaissance in growth investing is right around the corner. “In the long run, growth is the vehicle of choice,” she says. She has seen some pickup in inquiries from pension consultants, and is carefully watching the relative performance data.


Lipper research indicates that largecap growth funds and large-cap value funds had almost identical performance over the past year, each earning returns of about 9.1%. For the current year to date, the growth sector is down 0.7%, but ahead of value, which is off 0.95%. (Morningstar shows both categories ahead for the year, but growth is up by a greater margin.) These comparisons indicate a definite comeback by growth stocks, which over the past five years are down almost 8%, while value stocks have returned 3%.


It makes sense.


Value investing, which has led the performance charts the last several years, tends to focus on companies with relatively inexpensive valuations. Managers look for companies selling at low ratios of price-to-earnings or price-to-book value. The category typically includes cyclical companies that are out of favor, and looks most appealing at the bottom of the earnings cycle, when poor results discourage investors.


Well into an economic expansion, where we certainly are today, such companies are earning returns toward the high end of their cyclical range, and selling at loftier multiples. That is not a combination that leads to stellar future returns.


On the other hand, growth portfolios tend to be weighted toward industries such as health care, technology, retailing, and finance, where leading companies enjoy above average unit growth. Technological innovation or new product introductions are often key to that growth. Also, Ms. Bramwell points out that growth stocks usually outperform during periods of rising interest rates, because of their typically stronger balance sheets.


Today these distinctions are somewhat muddled.To the extent that developing countries generate rapidly rising infrastructure spending, companies that supply capital goods or basic products, typically cyclical in nature, may offer above average growth.


This is an area where Ms. Bramwell has been especially active.She believes we are in “the early stages of a long global economic expansion and that the equity markets should reflect this positively.” In particular, she is looking for growth generated by the maturing of economies such as those of China and India, as well as the Eastern Bloc countries and Brazil. As she points out, the economy in America is driven by upgrading and replacement demand. For these other lands, demand stems from the emergence of a middle class nurtured by capitalism and seeking a higher standard of living.


Her investments mirror that optimism. She holds a number of multinational companies that derive substantial revenues from overseas activities. Some of her largest holdings are companies like Dell (DELL $32), 3M Company (MMM $76), and Medtronic (MDT $57), which have seen a rise in the percentage of revenues generated overseas.


Closer to home, Ms. Bramwell is a longtime fan of Walgreen (WAG $45), which manages year after year to post same-store sales as it broadens its offerings and extends its geographic reach. She has also been buying a company called Robert Half International (RHI $37), an outsourcing company which supplies accounting services. Apparently, due in part to Sarbanes-Oxley legislation, we are suffering from a shortage of accountants. In a similar vein, she likes Automatic Data Processing (ADP $43), a company also benefiting from outsourcing, whose large cash position makes it a beneficiary of rising interest rates.


In the energy sector, which has also acquired growth status, Ms. Bramwell likes Peabody Energy (BTU $80) to take advantage of the relative attractiveness of coal. In her view, technological innovations will broaden the competitiveness of coal when compared to increasingly scarce natural gas.


Ms. Bramwell and her team of 10 use a bottom-up approach to select stocks. They tend to focus on companies described by Ms. Bramwell as “best of breed.” She is opportunistic and focused mainly on growth and quality. Her charter allows her to sell short stocks to a limited degree, which she does rarely, and she just added the ability to trade ETFs.Her turnover is below average, at about 60%, keeping costs low. In total, she is managing about $300 million between the two funds and institutional accounts.


Overall, Ms. Bramwell sees plenty of opportunities ahead for funds like hers to outperform. Perhaps, for the first time in a long time, growth is where the value really is.


peek10021@aol.com


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