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Growth Versus Value: Confessions of A Hedge Fund Manager

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One of the healthy signs for investors that the good times are not over showed up just recently. That sign is all about group rotation.

Growth sectors like technology and healthcare lead the market during the first half gaining nearly 12% versus just under 10% for the overall S&P 500. Other sectors like energy and financials that fit into the value universe increased a mere 4% seriously trailing the averages.

The rotation began in June and Wall Street strategists quickly picked up on the shift. It’s igniting a major debate over growth versus value.

During June, the S&P 500 Value Index had one of its best months all year increasing nearly 1%. On the other side the Growth Index had one of its worse months of 2017 falling nearly 2%.

The positive spin on this comes from people who make a daily living by trading the market consider this a very solid indicator that the good times are still with us.

The S&P 500 Index is market weighted, meaning that high priced stocks like technology and healthcare carry a disproportionate influence. This is especially true of the FAANG stocks: Facebook, Apple, Amazon, Netflix, and Alphabet’s Google.

These stocks are so important that they are an unofficial index of their own. June was a terrible month for these tech giants. So if the market managed to rise in the face of a falling FAANG, this is an indicator of the markets strength.

Things to Consider

As a former hedge fund manager, I loved to buy the out of favor sectors. Near the end of each year, I would scour the universe to find the two or three sectors that had been the worst performers of the year. Some call this value investing; I simply considered it common sense.

Even in areas like retailing where there are some serious long-term problems, there are always a few exceptions. Several Wall Street analysts have sited Tiffany & Co as an example.

Another thing to keep in mind is the role that activist investors are playing in beaten down and out of favor companies. Guys like Carl Icahn and others of a similar style are quick to put pressure on virtually any company in an effort to move the price of the stock higher.

What is The Right Answer For You?

If you are invested, it is always comforting to see signs like group rotation. Maybe this adds some logic to why the gage of market worries, the CBOE Volatility Index is around a lowly 12. There have been only two times this year when the index jumped as high as 15 but this is still well below it 10 year peak of 60 back in 2009.

So what is the right next move? Several things to keep in mind that only you can answer. Basic question number one: Are you an investor or trader? Most of the financial news headlines are directed at short-term performance issues such as the group rotation that occurred in June. If your horizon is retiring in 2040, is the performance in one single month all that important: probably not.

Serious minded investment advisors recommend periodic portfolio rebalancing once a year. There is nothing wrong with a quick review more often but there is an important thought. Alan (Ace) Greenberg, the former Chairman of Bear Stearns consistently recommend his clients rebalance their portfolios by selling only the loosing stocks.

Shifting from winning growth stocks to lagging value stocks may be a great strategy for money managers that are graded on their performance every quarter but these folks don’t pay taxes. Following Ace Greenberg’s principals, selling losers could actually reduce your year-end taxes. There is nothing wrong with that outcome.

No matter what your investment approach, the near nine year long rise in stock prices makes history every day that it continues. Nothing wrong with that.