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Value in vogue

The long bull market left value funds by the wayside. Recent volatility has put them back in favour again

Jim Cripps understands why some investors would be tempted to unload a fund that has lost almost 30 per cent in the last 14 months. But the Vancouver-based financial planner has been waiting patiently for the CI Value Trust Corporate Class fund to start posting some gains after some less-than-inspired returns.

In fact, he's considering buying more because, though value funds have been out of style in the bull market, recent volatile conditions put them back in favour again. But experts caution investors against loading up on value funds simply in reaction to market conditions.

Mr. Cripps identifies with investors who hold value funds.

"What do you do? Either you cut and run or you hang on and buy some more," says Mr. Cripps, who works with Vancouver Financial Planning Consultants Inc.

He's holding on because he thinks the likelihood of an American recession will cause investors to back away from growth funds - those whose values are based on what they might make in the future. Value funds, however, stay away from riskier holdings and instead load up on established companies that pay dividends and have predictable earnings. The biggest holdings in the CI fund, for example, include steady earners such as banks and electrical utilities.

"People have had a good five years, but this last year has been a bit of a nasty surprise. It's a time of market instability," says Mr. Cripps.

MSCI-Barra maintains indexes that track both value and growth stocks. In the last year, its value index plummeted by 9.54 per cent. The growth index was also in negative territory, but at a 0.5-per-cent loss, it almost broke even.

It's a different story over the long run, however. Over 10 years, the value index gained 6.7 per cent while the growth index only managed to post a 2.5-per-cent gain.

But does that mean you should phone your broker and demand she load you up with value funds that are a lot less expensive than they were a year ago?

Not necessarily, says Lew Johnson, a professor at the Queen's School of Business in Kingston, Ont. He says that while the tendency is for investors to flock toward value companies whenever there is a recessionary threat - because they offer products that are in demand regardless of economic conditions - most people should base their fund selection on their age, rather than their read on the markets.

Younger investors should pursue growth funds, because they have time to build their positions. More mature investors, he says, should stick with the steadier gains posted by value funds.

"A business cycle is seven or eight years," he says. "Hopefully, you're going to live well into your nineties. You'll have to go through many business cycles in your lifetime, and you shouldn't be focused on them. You should be thinking about your long-term needs."

Lorne Curry has been running his own financial planning business in Indian River, Ont., for 12 years, and has stuck with value funds regardless of the market conditions.

"I'd rather make a reasonable return over the long term than try and get big numbers all at one time," he says. "I just believe it's not worth trying to hit the homerun, because if you strike out, it hurts a lot worse and it takes longer to come back."

He tells his clients there will be years in which value funds decrease in value, but he tries to encourage them by saying that these dips present another opportunity to buy solid stocks at a discounted price.

"At certain points you are going to get statements that show you have less money than on the statement before," he says. "You need to know that you are in it long-term."

Joel Neynens doesn't see why investors should have to make a choice at all - the vice-president of Halifax-based Gordon Stirrett & Associates believes every Canadian should have holdings that are split 50/50 between value and growth.

"The problem people have had in the past five years is they'll buy a Canadian fund and then think they are well diversified," he says. "The thing they don't consider is that they should have half of that in value and half in growth. You can deviate a little, but for the most part, you don't want to play a guessing game."

If you are thinking of tilting the balance one way or the other, Mr. Neynens suggests value funds are where the action is likely to be over the next several years.

"Fears of a recession are causing a lot of the large blue-chip companies to decrease in value," he says, using TD Bank and Manulife as examples - TD Bank is almost 15 per cent off its 52-week high, while Manulife is off 18 per cent, yet both pay ever increasing dividends and have ever increasing profits.

"When people get scared, there's a flight to quality. So value investment managers will have a chance to buy some of these very solid Canadian companies at a nice discount. Over the next couple of years, the growth plays will be really out of favour."

However, there's a downside to putting your faith in value, Mr. Neynens says, noting you could easily find yourself missing out on some of the most exciting investments the country has to offer.

"If we do run into a growth market, you could really be sitting on the sidelines," he says. "A good example is Research In Motion - a value manager isn't likely to buy that. People looking for shorter-term oomph may be very disappointed."

© 2007 The Globe and Mail. All rights reserved.

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