Time to shift towards large growth?

[Lsbcal]

The reason I'm posting this is to get some comments on a tactical shift towards large growth. I know that some have tilted to large value and small value and that some people are quite adamant that LV & SV are best for the long haul. But I like to keep an open mind.

I've already got a large growth tilt but am considering shifting more of my equity towards large growth. In the last 6 months or so the market has started rewarding large growth stocks after a very long period of large value outperformance. Respected money managers have been quoted as suggesting that the pricing on large growth is reasonable now. And even value managers like Dodge and Cox have chimed in. To me it "feels" like the next year will be good for growth funds. My plan would be to shift back more towards a neutral market weight portfolio after the next year.

If you look at 2 representative ETF's you will see what I mean:
VTV, Vanguard Value ETF, https://personal.vanguard.com/VGApp/hnw/funds/holdings?FundId=0966&FundIntExt=INT
VUG, Vanguard Growth ETF, https://personal.vanguard.com/VGApp/hnw/funds/holdings?FundId=0967&FundIntExt=INT
and here is a graph for those closet technicians among us:
Yahoo! Finance Charts (use the slider in the Time Range to see longer history)

 

[twaddle]

Did you look at the growth holdings? It's hard for me to imagine how AAPL and GOOG have much upside from here.

I'd rather focus on quality earnings:

Earnings: Quality Means Everything

But I don't know of any index funds that give you that....

 

[Lsbcal]

Yes, GOOG and APPL make me nervous too. I've had much of my large growth dollars in Vanguard Primecap which is heavy in other areas like health. BTW here is an interesting Primecap management interview:
http://www.vanguardeurope.com/international/common/pdf/PRIMECAP_interview.pdf
The answer to the question "What do you think of current market valuations?" is particularly interesting in that interview.

If you add VPMAX (Primecap fund) on that Yahoo chart it almost looks like the chart for VUG (Vanguard Growth ETF).

 

[twaddle]

PRIMECAP looks like a good alternative to VUG. But look at how they both performed during the recent bear. I really have no idea how to time a switch from value to growth, but if I were just looking for a defensive fund, I might look at HSGFX or even BRKB.

 

[walkinwood]

Having just finished reading A Random Walk Down Wall Street... I feel holier than thou

There is plenty of evidence that market timing doesn't work & that's what you're trying to do.

But, its fun to try and outwit the market - go for it if you have the time or funds to handle the risk. Wish you all the best!

 

[LOL!]

Going to large growth is last year's story. I remember sitting in a presentation by our 401(k) provider in 2006 and him stating, "MorganStanley likes large growth going forward."

You gotta ask yourself, "Am I performance chasing?" Or, "Am I buying high?" Personally, I like buying out of favor assets which I see automatically from my asset allocation.

 

[Lsbcal]

Going to large growth is last year's story. I remember sitting in a presentation by our 401(k) provider in 2006 and him stating, "MorganStanley likes large growth going forward."

You gotta ask yourself, "Am I performance chasing?" Or, "Am I buying high?" Personally, I like buying out of favor assets which I see automatically from my asset allocation.

It may be last year's presentation but it's happening now. It's true I'm talking about going with the asset that is doing well now but I believe these are early days for large growth. You might want to read the Primecap interview article above particularly the comments on valuation. LV, SV, and REITs have had years of outperformance. Seems these are the areas that are questionable.

Anyway, I appreciate the counter arguments. Thanks.

 

[samclem]

Stocks in a value index fund stay in that fund's portfolio until the stock price goes up at a rate faster than earnings or book value (so that they fall into the "growth" category), at which time they are sold and the MF takes the money and buys more cheap stocks. I like that.

Stocks in a value fund stay in that fund's portfolio as long as the stock price is high relative to earnings and/or book value. When the stock price falls (relative to earnings or book value) far enough, the stock enters the "value" category and the MF sells it and uses the money to buy another (relatively) high-priced stock.

This is one reason I'm more comfortable staying with a high allocation to value stocks. The funds sell their "winners" automatically. If you believe that now is a good time to change your allocation to hold more growth, you'll also need to make another good call as to when to switch back. And as long as you're overweighted in growth you'll be giving up dividend yields.

 

[Lsbcal]

Stocks in a value fund stay in that fund's portfolio as long as the stock price is high relative to earnings and/or book value. When the stock price falls (relative to earnings or book value) far enough, the stock enters the "value" category and the MF sells it and uses the money to buy another (relatively) high-priced stock.

There is go-go growth and then there is what might be called GARP -- growth at a reasonable price. I believe funds like Primecap follow the later approach. Similiar things happen in value land. There are funds like DFA's DFLVX which have more extreme value styles then, for instance, Dodge and Cox's DODGX (which I own).

I don't think you will find Primecap necessarily selling stocks just because of a short term earnings shortfall but there are growth funds that are momentum oriented. Basically I'm saying one should not assume the fund universe is as simple as value versus growth.

I personally don't find it easy to set target allocations other then the stock/bond allocation. There are perhaps two approachs that seem to get a lot of mention (1) TSM and (2) value tilt. Neither seem to be completely satisfying to me but at least TSM sets the equity style allocation in stone. With value tilt how much is too much? It is certainly true that with a tactical shift multiple decisions over time may be required.

Sorry if I'm rambling on a bit but I don't have the great confidence in value to completely and consistently value tilt. The reason for the excess returns in value has to do with risk and the risk can show up at really terrible economic times when you least are able to deal with it. From what I understand from secondary sources this (association of value investing with higher risk) is the conclusion of people like French-Fama.