Beyond growth and value: Investors are tired of choosing

AP News
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Posted: Feb 18, 2016 12:37 PM

NEW YORK (AP) — Coke or Pepsi? Biggie or Tupac? Growth or value?

For decades, investors chose their stock mutual funds from one of two distinct camps. On one side were growth funds, which bought only the most dynamic stocks with the fastest-rising revenues and profits. On the other were value funds, which hunted the bargain bin for stocks with cheap prices relative to their earnings.

Today, just like more people are choosing neither Coke nor Pepsi, investors are pulling out of both growth and value stock funds. Instead, they're pouring cash into broad index funds and other options that don't pigeonhole themselves into one of the two investing philosophies.

The moves are the result of several trends that are reshaping the investment industry. Chief among them: People are looking for ever-simpler ways to invest, and they're opting for index funds that track the broad market. So, instead of holding a small-cap growth fund plus a large-cap value fund plus a mid-cap growth fund, more investors are holding just one fund that tracks the entire stock market.

The numbers bear out the change in preference. Investors pulled a net $36.2 billion from U.S. growth stock mutual funds and exchange-traded funds in the 12 months through January, according to Morningstar. Another $42.6 billion left U.S. value stock funds.

At the same time, $12.5 billion went the opposite direction, into "blend" funds, which own a mix of both growth and value stocks.

The trend isn't as strong with foreign stocks, where investors are still putting money into growth and value stock funds. And even with U.S. stocks, growth and value funds still command big piles of dollars. Together, they control $2.9 trillion, more than the $2.7 trillion that sit in blend funds. But the trend is moving toward U.S. blend funds eventually overtaking their growth and value rivals.

One reason for the shift is that investors are tired of picking which philosophy will do best. Or, rather, they got tired of getting it wrong when they tried to pick which would do best.

Growth and value stocks tend to take turns at the top, with growth leading for some years before ceding leadership to value. Growth stocks, for example, were in favor during the dot-com boom of the late 1990s. Investors at the time were excited about the "new economy" and were more interested in companies attracting "eyeballs" than in those making profits.

After getting burned by the dot-com bust, chastened investors turned back to value stocks. For seven years, the value stocks in the broad Russell 3000 index beat their growth counterparts, from 2000 through 2006. After that, growth stocks regained the lead and had better returns in five of the following seven years.

So instead of guessing whether growth stocks will do better than their value counterparts, investors are simply buying broad-market funds that own both groups.

Perhaps the biggest reason for the trend is the migration into index funds generally, says Alina Lamy, a senior analyst at Morningstar. After seeing the majority of actively managed stock mutual funds fail to keep up with indexes, investors have been streaming into options that merely try to match the index rather than beat it.

Some index funds focus on just growth or value stocks. But the most popular ones cover broad swaths of the market and include both.

Vanguard's Total Stock Market Index fund, for example, has $385.9 billion in assets and tracks the entire U.S. stock market. It's also more than 10 times as big as Vanguard's Value Index fund and eight times as big as its Growth Index fund.

Before dumping growth or value stock funds and going into these broad-market index funds, investors need to be OK with getting the market's returns. With index funds, they'll no longer have the chance of beating the market. They may also trigger a capital-gains tax bill, if they're selling growth or value funds that have been sitting in a taxable account for many years.

In exchange, though, investors are getting lower fees and the assurance that they won't do any worse than the market.