As mutual fund managers keep developing exotic new recipes to offer investors, it sometimes seems as though no one cares about plain vanilla growth funds anymore.
A generation ago, these funds were the staples of the industry--practically the reason funds were invented in the first place. Until the 1970s, alternatives such as money-market funds and municipal bond funds didn’t even exist.
Today, growth funds still represent one of the more common types. At last count, there were more than 400, nearly double the number of any other category of stock funds.
But they get little attention these days, a time when the equity-fund spotlight focuses on newer or trendier classifications such as international or sector funds.
One source of growth funds’ troubles has been the weak recent performance of the big-name growth stocks such as food, tobacco and pharmaceutical companies that have long been mainstays of their portfolios.
All through 1992, and again this year, one after another of these paragons has been subjected to a punishing reappraisal by investors.
“We’ve been going through one of the most vicious anti-growth periods in 15 years,” says Jonathan Schoolar, portfolio manager at the AIM Weingarten Fund in Houston.
“I think this cycle of traditional growth being out of favor is going to last longer than people expect,” Schoolar added. “Rather than a year and a half, it may be as long as three years.”
Through the first seven months of 1993, standard growth funds struggled to a total return of 3.77%, as tracked by the Morningstar Mutual Fund Performance Report in Chicago.
That was the poorest showing for any of the 16 categories of stock funds Morningstar lists, except for the specialized health-care funds, which were down more than 10%.
Partly because of such performance numbers, analysts say, growth funds are simply out of vogue. The more stylish approach in stock market investing these days is to look for “value,” or stocks that are bargain priced relative to their potential in an economic recovery, rather than for steady, predictable earnings growth.
If growth is your style, many investors are reasoning right now, there are other promising places to look other than in standard big growth stocks--small company growth funds, for instance, or funds that invest in emerging markets overseas where capitalist economies are just beginning to flourish.
With all that, however, many observers argue that growth funds modeled along the classic lines will eventually pull out of this down cycle and return to favor.
After all, they say, growth is growth, and sooner or later it provides its own rationale for long-term investors, even if the roster of favored companies must necessarily change as time passes.
“There is always going to be long-term growth,” says Arthur Bonnel, the Reno, Nev.-based portfolio manager of the MIM Stock Appreciation Fund, whose headquarters are in Independence, Ohio.
In the meantime, analysts say the recent setback for the growth-fund faithful sheds some light on a perverse pattern in growth investing. Although the earnings of growth companies may advance at a strong and steady rate, the progress of their stocks has historically come in fits and starts.
“Dividend income tends to be stable and durable over time. Capital growth is more volatile and spasmodic,” says John Bogle, chairman and chief executive of the $110-billion Vanguard Group funds, in his new book “Bogle on Mutual Funds.”
But dividends are subject to current taxation, even if they are reinvested. Capital growth is not taxed until it is paid out by a fund in the form of a capital gains distribution, or until you cash in shares of a fund yourself.
Writes Bogle: “If you are in the accumulation phase of your life cycle--unconcerned with generating current income from your investments and interested in minimizing taxable income--you may well prefer a growth fund over an equity income fund.”