Never quite sure if a stock fund you own is a "growth" or "value" fund? Just check its performance in the third quarter.
Growth funds rallied, while value funds mostly lost ground in the three months ended Sept. 30, one of several significant shifts amid a wild time in financial markets.
Another momentous shift: the resurgence of big-company stocks, while smaller stocks struggled.
Overall, most stock funds made money in the quarter, despite extraordinary market turmoil triggered by a global credit crunch.
The average diversified U.S. stock fund was up 1 percent in the quarter and up 9.9 percent for the first nine months of the year, according to Morningstar Inc. The average foreign fund rose 4.9 percent in the quarter and 17.3 percent for the first nine months, again enjoying the tail wind of a weak dollar.
But if the trends underlying stock funds' recent returns continue, investors' portfolios could be facing a radical turnabout from what they have known for much of this decade.
Value-oriented stocks and funds have mostly ruled the market since 2000, as many investors sought relative safety in shares that appeared cheap based on their earnings or other measures. That's the classic definition of value on Wall Street.
By contrast, many growth stocks, shares of companies whose earnings are expected to grow at an above-average pace over time, have been in the doghouse since 2000. That was the beginning of the crash in technology shares, which have long epitomized growth investing.
But look who's back on top this year: In all three broad categories of stocks -- large-capitalization, mid-cap and small-cap -- growth-focused mutual funds handily outpaced value-focused funds in the quarter and for the first nine months, according to Morningstar.
Mid-cap growth funds, for example, gained 3.7 percent in the quarter, on average, while mid-cap value funds lost 3.2 percent. Fund returns include share price change plus dividends.
Funds that focus specifically on tech issues rose 6.6 percent in the quarter and 17.8 percent in the first nine months of the year.
Growth-stock fund managers have been telling their shareholders for the last two years that a rebound was overdue.
"This year it finally happened," said John Calamos Sr., head of Calamos Asset Management in Naperville.
His $15 billion Calamos Growth fund surged 21.8 percent in the first nine months, boosted by hefty holdings of tech shares, including Apple Inc., Google Inc. and Nokia.
Many market pros say the gains in the growth sector, and the sell-off in value, reflected some simple math: As growth stocks lagged in recent years, they began to look inexpensive relative to underlying earnings.
The opposite was happening to value stocks: As the shares rose, they began to look pricey compared with earnings.
"Valuations have been compressing for years between value and growth stocks," said Greg Carlson, an analyst at Morningstar in Chicago.
"Growth just got too cheap," Calamos said.
Cases in point: At midyear, shares of cell phone giant Nokia were at about $28, or 16 times the $1.76 a share the company is expected to earn this year.
Railroad company Union Pacific Corp., traditionally a value stock, was more expensive than Nokia at midyear, with the stock's price-to-earnings ratio at about 17.
Nokia shares jumped 35 percent in the third quarter, while Union Pacific's slipped about 1.5 percent.
Apart from valuations, the shift to growth and away from value was helped along by the market upheaval of midsummer, money managers say.
The credit crunch fueled by the U.S. housing sector's woes raised doubts about the domestic economy's health. That boosted demand for shares of companies that seemed to have a good shot at outpacing the growth of a weak economy.
At the same time, bank and brokerage stocks were hammered by the credit crunch and fears of rising defaults on high-risk mortgages and other dicey loans. Financial stocks have long been a mainstay sector for value investors because of their typically low P-E ratios.
Funds that focus exclusively on financial stocks were among the biggest losers in the third quarter, falling 3.6 percent on average, according to Morningstar. They were down 3.1 percent for the first nine months.
Another classic value sector that has struggled this year: real estate-oriented funds, which mainly own shares of real estate investment trusts. The group was down 3 percent, on average, for the first nine months after a 1.6 percent drop in the quarter.
The rush to growth stocks was a global affair in the third quarter. Foreign large-cap growth stock funds were up 5.3 percent, compared with 1.1 percent for foreign large-cap value funds, Morningstar said.Copyright © 2014, Los Angeles Times