The stellar third-quarter performance of growth stocks is prompting some money managers using both value and growth in their portfolios to tilt toward growth.
Growth stocks outperformed stocks in essentially all capitalization categories during the third quarter. That might signal the beginning of a resurgence for growth stocks, which have been out of favor and generally had lackluster performance for the past three years.
Harbor Capital Management Co., Boston, is shifting toward the growth sector from a 50/50 blend, and will be up to 55% growth stocks by the end of the year, said Lawrence J. Marks, managing director. Harbor is the most widely known firm that combines growth and value in the same portfolio.
Gerald H. Scriver, chief investment officer at WestPeak Investment Advisors, Golden, Colo., said he, too, has started tilting portfolios more into the growth sector.
He said WestPeak was 70% invested in growth stocks in early 1992 and 70% invested in the value sector in 1993. For most of 1994 the firm has been nearly equally weighted in value and growth stocks, he said, but in recent weeks has started moving toward the growth sector.
Roxbury Capital Management, Santa Monica, Calif., also is tilting its portfolio toward the growth sector from a 50/50 value-growth mix, said George Cones, managing director.
He said the firm is heading toward a 75% weighting in growth stocks.
"We saw it emerging earlier this year and have been tilting more to those factors which drive growth stocks, such as higher price momentum," WestPeak's Mr. Scriber said. Noted Harbor's Mr. Marks: "Since growth-value cycles seldom last longer than three years, and the current value cycle is just about 3 years old, we think a leadership shift is the more likely outcome."
Factors coming together that make the outlook for growth stocks more positive include an anticipated leveling of long-term interest rates and weakening of consumer confidence in the economy. Also, value stocks, heavy favorites of institutional investors for the last three years, seem to be fully priced at current levels.
Mr. Marks also said recent strong corporate profits, which favor the value sector, were higher than expected. "The rate of change from here starts heading downward. Profits may still go higher, but the market looks well ahead. All the factors that favored value stocks a year ago are happening now, so we now need to look at next year," he said.
Inertia is the last factor in Harbor's conclusion that growth stocks are headed for a rebound. "A trend in motion tends to stay in motion until something happens to change it," Mr. Marks said. "During the last quarter, growth stocks far outperformed value stocks. Was it a flash in the pan or was it real? We have concluded that it was real."
Harbor in recent weeks has added technology companies such as Cisco Systems Inc. and Nokia Telecommunications Oy; industrial growth companies like Ionics Inc. and General Electric Co.; and "old-fashioned growth stocks" like Coca-Cola Co. and Home Depot Inc.
He expects growth stocks to perform well for the next 12 to 18 months although "there probably won't be as much excess return in the growth cycle as in the recent value cycle which ended in 1993 but it is definitely in place."
WestPeak has been buying "traditional growth stocks" like Philip Morris Cos. Inc., Merck & Co., Procter & Gamble Co. and Johnson & Johnson.
Roxbury, meanwhile, has added such issues as Intel Corp., Motorola Inc., Philips Electronics N.A. Corp., Coca-Cola and Philip Morris.
"We are looking at the market for top-line growth stocks now because we think we are reaching the end of the cycle where value stocks have done well. We see a lot of potential in the growth sector now," said Mr. Cones of Roxbury.
Some consultants, while acknowledging the surge in growth stock performance, nevertheless don't advise major shift in emphasis in portfolios to try and catch the performance wave.
"The academic research indicates value will dominate over the long term, so to jump into growth after a year's run may not be in the investor's best interest," said Dennis R. Hammond, president of Hammond Associates, St. Louis.
"We recommend you determine a balance over time and stick with it rather than jump in and out and attempt to time the market."
Mr. Hammond said the economic cycle "suggests that growth stocks will do well in 1995. If we tame inflation and we don't slide into a recession, people will pay up for stocks and we will continue to see growth stocks do well. But would I shift the portfolio to try and capture that? You would have to be extremely nimble on a consistent basis and most people don't believe you can time it in and out of the market consistently."
Recent market declines have resulted in some traditional value managers starting to add beaten down growth stocks to their portfolios.
Jim Barksdale, president of Equity Investment Corp., Atlanta, considers himself a value-oriented manager "but I feel like my portfolio has taken on more growth characteristics than during the 1989-1992 period."
During the past several months, "because many growth companies have been beaten down (in price) they have become available for me to buy; some of the value stocks I have owned and sold have been replaced by growth stocks or stocks with growth characteristics."
Mr. Barksdale has added such companies as A.G. Edwards & Sons Inc., Anheuser-Busch Cos. Inc., and A.T. Cross Co. to the portfolio.
