Money managers see shift to growth stocks
By Meg Richards
Associated Press
NEW YORK — At this time last year, money managers were betting that growth equities would outpace value, and that large company stocks would produce better returns than small caps.
Instead, over the past 12 months, the opposite has happened. The value stocks of the Russell 3000 total market index surged 14.4 percent in 2004, according to the iShares exchange traded fund that tracks it, while growth stocks logged a much less impressive 5.3 percent gain.
The comparison by size is even more dramatic: The small-cap Russell 2000 index soared 17 percent, while the large-cap Russell 1000 index — which correlates closely with the Standard & Poor's 500 — rose just 9.49 percent.
How could Wall Street have gotten it so wrong? Most analysts insist their forecasts weren't incorrect — just premature. The continued strong performance of small-cap and value stocks surprised many professional investors during 2004, but the vast majority remain firmly convinced a style shift to large-cap growth still lies ahead.
"The shift to large-cap did not pay off in 2004; we think it will in 2005," Tobias Levkovich, chief U.S. equity strategist at Citigroup's Smith Barney division, wrote in a recent research note to clients. "Valuation, dividends, growth and balance sheets all argue for a shift in style investing."
Given these factors, Levkovich said, 2005 may well emerge as a year when the investment style you choose matters far more than selection by sector or industry group. He's favoring large-cap growth over small- and mid-cap value.
"While this may be somewhat of a consensus call, most money managers who have made this shift have been punished by underperformance over the past six months or so," Levkovich wrote. "Thus, the Street's conviction in this trade is fairly low. Ours is not."
A recent survey by the Russell Investment Group found that Levkovich is far from alone. Of more than 100 fund managers surveyed, 62.5 percent expressed bullish sentiment toward large-cap growth, an area of the market that has lagged for the better part of two years.
The survey found investment managers "are not wavering," said Randy Lert, chief portfolio strategist at the Russell Investment Group. "If anything, their conviction level is even higher as a result of the fact that it hasn't paid off yet."
Most money managers surveyed by Russell remain bearish on fixed income, which also showed unexpected strength in 2004; a notable 12.1 percent were bullish on high-yield bonds. They're also quite concerned about interest-rate sensitive sectors of the equity market, including financial stocks and real-estate investment trusts.
What might give you pause is that most of these investment pros had the same outlook six months ago, and their predictions haven't come to pass. In fact, the Morgan Stanley REIT index has gone up 25 percent since June 30. The Lehman Brothers Aggregate Bond index crept up 1.9 percent during the second half.
Despite that, experts believe REITs, fixed income and small caps are all heading for a fall. The message for individual investors, Lert said, is that when you take a market position, it isn't always immediately rewarded — and that's not necessarily a reason to bail out.
"If you still believe the argument for taking that viewpoint remains valid, you have to stick with it. You have to persevere, through periods of underperformance," Lert said. "I think most of the managers feel that way."
Of those surveyed, 70 percent find the market fairly to attractively valued, but with the recent rally, the areas that have done well, particularly small-caps and REITs, are "getting a little overheated," Lert said. Conversely, the areas that have not done as well are undervalued.
Most believe corporate earnings and interest rates will be the most influential factors in investment performance in 2005, while the value of the U.S. dollar and energy prices will be of secondary importance. Job growth, geopolitical stability and corporate ethics are likely to have little impact, the survey reported.
On a sector basis, managers are most bullish about healthcare and utilities, but have turned decidedly bearish on autos and transport stocks.
At least some of the recent underperformance of large-caps can be attributed to headline pressures, Levkovich noted. The large-cap trade "did not pan out in 2004 ... for a variety of reasons," he said, including product problems at large pharmaceuticals, investigations in the insurance industry and a general preference for lower-quality stocks in the recent rally.
As the new year takes shape, he predicts, investors will increasingly migrate to larger companies that can generate growth, have pristine balance sheets and what are generally considered to be good management teams.
