GLOBAL - Growth style investing is poised to make a comeback in 2005, Janus Institutional Asset Management argues.
In its paper The Case for Growth, Janus says while value investing produces better returns during the recovery phase of the business cycle, investors have tended to rotate back into the growth style as the economy transitions to the prosperity phase of the business cycle.
Growth managers’ focus on a company’s future earnings potential when analysing investment opportunities, whereas value managers are more interested in the current price of a stock relative to its intrinsic value.
Janus sets down four arguments supporting its theory that growth investing is poised for a rebound: growth is cheap, volatility has declined, returns on capital vs cost of capital and the pendulum effect.
According to the paper, financial theory suggests that when return on invested capital exceeds the weighted average cost of capital, business investment spending has the potential to increase.
“Today the markets are acting in contradiction to the historical data,” the paper noted. “As we move through 2005, the economy is now almost three and one-half years past the end of the last recession (November 2001); yet the value style continues to outperform growth.
“We believe investors are reluctant to rotate back into growth stocks due to higher oil prices, a declining dollar and the after effects of the 2000/2001 market decline. However, with each passing quarter, data is accumulated that, in our opinion, provides evidence that the recovery will be sustainable, that business activity has settled into a more ‘normal’ pattern and that valuations are reasonable.
“Based on this analysis, it would appear that all the pieces are in place for a potential rotation into growth stocks. If the bull market extends into a third year during 2005, we believe investors should be sufficiently convinced in the durability of the recovery to move back into growth stocks.”
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