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Pendulum swinging for growth and value holdings


Microsoft Corp. a value stock?

Yes, the essential software growth stock of the 1990s is today "a compelling value investment," said Michael Embler, chief investment officer at value-driven Franklin Mutual Advisers.

"In the last 18 months or so, we have been drawn increasingly as value investors to companies that were traditionally categorized as growth companies but had fallen off the growth wagon," said Mr. Embler, the lead manager of the $1-billion Mutual Beacon Fund.

Hardcore value managers are finding bargains in an unusual place -- growth stocks.

Take, for example, the AIC Value Fund, a U.S. equity fund that adheres to the bottom-up, buy and hold tenets of renowned investor Warren Buffett. Internet security firm Symantec Corp. and computer maker Dell Inc. are significant holdings.

"We try not to put any shackles on ourselves; mathematically speaking, I don't know why you would. We want to be as objective as possible. . . . We try to go in with open eyes and see value . . . regardless of where it might be," said Anthony Hammill, co-manager of the $256.7-million fund.

Growth-style investing was best defined by the technology sector's heady bull run in the late 1990s: finding a stock with momentum and hanging on for the ride.

Value investing, meanwhile, is all about scooping up a hidden gem at a discounted price. Managers often have very specific financial criteria that factors in to stock buying and selling.

A series of factors have made so-called value stocks a scarce commodity. Investors are in a defensive mood, favouring bread-and-butter value stocks with predictable cash flow and reliable dividends. Meanwhile, the world economy is growing, driving margins and stock prices higher on a global scale. And lastly, private equity investors are diversifying their asset mix and taking many undervalued firms private, further limiting the scope of publicly traded stocks.

"We continue to have problems finding compelling bargains in the marketplace," said Francis Chou, founder of Chou Associates Management Inc., in his March 2 annual report. "Not only are P/E (price-to-earnings) ratios and price-to-book values still high, and dividend yields low, relative to historic valuations, the number of companies that are underpriced is at an all-time low."

The portfolio of the $729-million Chou Associates Fund, in fact, looks a lot like a tech portfolio from the late 1990s. As of Dec. 31, major holdings in the global balanced fund include biotech Biovail Corp., satellite TV provider DirecTV Group Inc. and Internet giant Level 3 Communications Inc.

"We've had three years of almost straight up in the equity markets," said Richard Jenkins, a fund manager with AIM Funds Management Inc. that overseas about $7.3-billion in assets.

"We're all trying to find businesses that have the potential to grow revenues, profit and cash flow for the lowest price you have to pay," he said, adding that in recent months, the "buy" list has included software companies and computer chip makers.

In contrast, Martin Hubbes, chief investment officer at AGF Management Ltd., argued that after a decade of extremes in valuations for growth and value stocks, "the pendulum is swinging back toward the middle," leaving a vast mix of both undervalued and fully priced equities.

"I always get really nervous when things are pegged as growth and value. I think those things change. A growth company today can eventually mature and stop being a growth company. You have to be careful. It can lead to bad investments," said Mr. Hubbes, a self-described "GARP" manager, a middle-of-the-road investment style targeting undervalued growth stocks. AGF holdings include technology stalwarts Cisco Systems Inc., Research In Motion Ltd. and Microsoft Corp.

© 2007 The Globe and Mail. All rights reserved.

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