Same Fund Family: Value Vs Growth

Same Fund Family: Value Vs Growth

Value Vs Growth: An Unscientific Case Study

You can find a few reasons to like managed mutual funds: instant diversification, the possibility of beating the market indices, and no-hassle record keeping/tax reporting. In return, you’ll pay low to moderate fees and risk the possibility of underperforming the market. Mutual fund families such as Vanguard and Fidelity offer a bewildering array of funds, but we’re going to focus on two from Fidelity: the Value Strategies Fund and the Growth Strategies Fund.

Value Vs Growth: Common Features

Both funds concentrate on mid-cap stocks, but will snap up larger and smaller companies from time to time. They have similar expense ratios, just below 3/4 of a percent, and neither charges 12b-1 fees, although Growth Strategies enforces a 1.5 percent short-term (90 days) redemption penalty. They also share a minimum initial investment requirement of $2,500 and plenty of convenience features, including direct deposit and automatic account builder.

Value Vs Growth: Comparative Strategies

Jean Park has been at the helm of the Growth Strategies Fund since 2013. The fund seeks capital appreciation by selecting companies that it believes will benefit from high revenue growth or accelerated earnings. Its top 10 holdings account for just over 17 percent of the total portfolio. Thomas Soviero, manager of Value Strategies Fund since 2010, also pursues capital appreciation, but does so by looking at undervalued stocks based on their assets, earnings, sales or growth potential. The top 10 holdings represent over 32 percent of the portfolio, making it almost twice as top-heavy as Growth Strategies Fund.

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Value Vs Growth: Returns

In Table 1, we compare the returns over several holding horizons, as of the date of publication. We also include the returns of Fidelity’s Spartan 500 Index Fund to benchmark an unmanaged investment.

  Growth Strategies Value Strategies 500 Index
One Year 25.89 22.98 25.14
Three Years 12.17 14.41 20.50
Five Years 18.42 21.71 16.78
Ten Years 6.61 7.91 8.31

Table 1 – Percentage Returns

With the caveat that two mutual funds does not a scientific study make, its apparent that the value-oriented fund did best over the last five years, while the index fund trailed badly over the same period. Nevertheless, long-term investors might find its surprising that the 10-year performance of the index and value funds was close, while the growth fund trailed by at least 1 percentage point. A 10-year period is important because it’s long enough to encompass one or more business cycles.

Value Vs Growth: Comparing the Risks

Of course, value investors are especially attuned to risk, because value stocks are supposed to be lower-risk investments, and you might gladly exchange some return for significantly lower risk. Fund companies must publish several risk metrics, but the one I like the most is the Sharpe Ratio, the excess return (above the risk-free rate) divided by its standard deviation, a proxy for risk. A higher Sharpe Ratio indicates you are getting more return for each unit of risk. Table 2 shows some risk metrics for our three funds:

  Growth Strategies Value Strategies 500 Index
Sharpe Ratio 1.05 1.35 1.67
Beta 1.07 1.08 1.00
R Squared 0.97 0.90 1.00
Standard Deviation 15.80 14.79 11.60

Table 21 – Risk Indicators

The results aren’t too surprising — the value fund is less risky than the growth fund, but the index fund is the most risk-efficient. We’ll delve deeper into index strategies in our next post.

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