Value and Growth Funds Blurring

The latest issue so BARRON'S has an interesting article on the blurring of the line between growth and value investing mutual funds.

Seems that, because value funds have been doing so well ever since the infamous dotcom boom busted, many "growth" fund managers have been buying value stocks. Well, fair's fair, since during the late 1990s, many "value" fund managers bought into technology, just in time to experience the bust.

This illustrates another reason to avoid mutual funds if possible -- you can't depend on them to buy the kinds of investments they claim to specialize in.

It's also interesting that, according to this article, the line between value and growth investing is blurring. Value and growth managers are loading up on the same companies.

In theory, this could be the best of both worlds -- underpriced stocks that are growing faster than the market. Actually, the article doesn't describe the situation and is a little unclear, except to say that some stocks that were formerly growth favorites -- specifically, Wal-Mart, Microsoft and Dell -- have gotten so big that they can't deliver 20% a year growth any longer.

Personally, when it comes to growth I believe that Dr. Jeremy Siegel has the right idea -- it's a trap. Your returns are lower than you think they'll be because you pay too high a price.

When it comes to value, you may do well if the stock pays dividends, since you're presumably getting a good stream of income for a low price. If there're no dividends, you're engaging in a crap shoot. You may find a future. You may lose your money.



growth and value investing blurring
growth and value investing blurring

The Sharpe Ratio is not a constant

Recently I read THE 25% CASH MACHINE by Bryan Perry, which described ways to invest for income that most people have never heard of: real estate investment trusts (REITs), Canadian business trusts, Canadian royalty trust, business development corporations, closed end mutual funds (I'm not sure why this is a classification by itself, since the profitability or income yield of any given closed end fund is going to depend on what the fund invests in and how well it's making money, not on being a closed end fund per se), profitable sectors (now likes shipping of oil and bulk materials) and master limited partnerships.

One reader gave feedback on Amazon about how this book should come with a warning label, since it's established financial theory that to get more income you must take on more risk, so anything that pays so much income must have high risk -- Q.E.D.

I'm not defending the book itself -- I thought it described most of those things much too sketchily. I still have many more questions than answers, especially for the more exotic stuff. REITs are well-established and gaining accepting an investments. Besides, you can buy books that do a good job of explaining them. The same is not true of Canadian business trusts, royalty income trusts, business development corporations and master limited partnerships.

But the concepts do seem legitimate. I haven't done all the research I would have to do before investing my money, but I'm not writing them off just because their pay a lot of money.

After all, if every investment gave off the same amount of income given the same degree of risk, every investment would have the same Sharpe ratio and that would be a useless figure, because constant throughout the investment world, and that's just not true.

Isn't it possible some of these investments have high yields because so few investors know about them?

risk and yield
risk and yield