US - Low volatility and predictability of returns over the long term make US growth stocks a good match for pension funds, says Atlanta-based Montag & Caldwell Investment Counsel.
The US large cap growth stock manager, an affiliate of ABN AMRO, believes 2005 will see a return to favour of US large cap growth stocks, reversing a five-year trend of domination by value and small-cap stocks.
Speaking at a press briefing in London, David Watson, fund manager of ABN AMRO US Equity Growth fund and vice president of Montag & Caldwell, said over the long term, US growth stocks were more predictable than the rest of the equity market, particularly the US equity market, making them a favourable investment for pension funds.
The firm has pension funds clients in the US, Canada and Europe - some segregated mandates, and a number of pension investors in the Netherlands and Europe who invest in the firm’s mutual fund.
With widespread forecasts of higher US interest rates and slower economic growth, he said the hope for large cap growth lay in the fact that these companies tended to be “far less sensitive” to interest rate swings and downturns in the economic cycle than their value counterparts.
“Traditionally, growth stocks outperform when the economy is in the process of decelerating, as we are seeing at the present time,” Watson said. “Since the bursting of the tech bubble in March 2000, value stocks have outperformed growth stocks by 16.47% on an annualised basis, as measured by the Russell 1000 Value and Russell 1000 Growth indices, and we now see them as being fully priced.”
He added: “With tremendous uncertainty in the US over the prospects for prospective earnings and the possibility of contracting profit margins and rising interest rates, I believe that growth stocks are returning to favour and should perform well going forward for a period of several years.”
Watson views the energy sector in a positive light and has increased the fund’s portfolio weighting in the sector from 3-4% to 12%.
“We are also significantly overweight in the healthcare sector relative to the S&P 500,” he said. “In the last year we have broadened our representation in the sector, reducing weightings in R&D pharmaceuticals, increasing weightings in biotech and adding exposure to pharmacy benefit management.”
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