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By Keith Damsell
The Globe and Mail
Report on Mutual Funds
Thursday, January 26, 2006
Fund managers predict a resurgence as value equities lose some of their lustre, KEITH DAMSELL writes
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "Over a five year window, I'll get mileage out of growth and value. Let's stick with quality and buying the right fund for the client.”
The tipping point for much-maligned growth-focused mutual funds came at a Tony Arizona resort in November last year.
Before an audience of about 300 financial advisers at the Westin Kierland Resort and Spa in Scottsdale, legendary investment guru Peter Cundill made a surprising pronouncement. The deep, deep value manager of more than $9-billion told the crowd that the best value in the market may be in growth stocks.
"I thought, 'Hey, that's great'," said attendee Philip Taller of Bluewater Investment Management Ltd. and manager of the $1.3-billion Mackenzie Universal Canadian Growth Fund.
"There's not a lot of value in value because value stocks have done so well," he said. "Value investors are telling us they are hard pressed to find value."
Mr. Cundill's observation represents a sea change in the outlook for the market. Growth-style investing, out of favour since the tech bubble burst in 2000, is poised for a comeback.
Growth managers aren't necessarily looking to buy a stock at a bargain price; they are looking to future share-price gains. In general, growth funds hold a stock for a shorter time and there is higher turnover within the portfolio.
"The companies that we are buying might have a great long-term growth profile, but there is something in the marketplace holding the stock price down," Mr. Taller said. "If you can convince yourself it's a temporary problem, then you have got a great confluence of factors. You've got growth at a really good price, the Holy Grail of what we are trying to achieve."
The 1990s were the decade for growth managers. The booming junior exploration market, coupled with intense interest in the Internet and technology plays, made speculative growth managers including Ian Ainsworth and Clas Olsson the toast of Bay Street. Growth-focused companies saw billions in net sales, a list that includes AIM Funds Management Inc., AGF Management Ltd. and Altamira Investment Services Inc. Top performers included the Dynamic Power Canadian Growth Fund and the Fidelity Canadian Growth Company Fund.
Everything changed in the spring of 2000. The Nasdaq Stock Market crashed, the Internet-fuelled tech bubble collapsed and growth stocks and funds have been behind the tool shed ever since. Value fund managers have made the most of the market, snapping up hidden gems at a discounted price.
Managers often have specific financial criteria that factors into the buying and selling of stock. The investment horizon is generally longer term in comparison to that of a growth fund.
Since 2002, the share prices of debt-heavy companies, resource firms and small-cap companies have served buy-and-hold value managers very well. Funds with a value mandate have excelled, among them the CI Canadian Investment Fund, the Dynamic Canadian Value Fund and the RBC O'Shaughnessy U.S. Value Fund.
Value guru Eric Sprott has spent this decade trouncing the competition. Since 2000, the $950-million Sprott Canadian Equity Fund has returned a stunning annual average of 32.4 per cent.
"We buy when things are better value, but when they are successful, they are considered growth stocks," Mr. Sprott said. "Things kind of morph . . . things that are deadbeat companies when you bought it, then, all of a sudden, after three years of 20-per-cent earnings growth, they are put into a different category."
Indeed, three consecutive years of double-digit gains have made three core categories regularly mined by growth managers an expensive proposition.
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