Large-cap growth may seem a misnomer after the S&P 500 dropped by 5% earlier this month, but the swift retreat has barely dented the long-term performance of this sector’s best managers.
While the sudden reappearance of volatility may have shocked some, the real surprise would be if large-cap equities substantially weakened any further.
T. Rowe Price chief investment officer Rob Sharps, who also co-manages the firm’s Blue Chip Growth fund with Citywire A-rated Larry Puglia, noted that a growing global economy was supporting higher corporate earnings.
According to data provider FactSet, as of early February around half of the S&P 500 had reported for the fourth quarter of 2017. Of those, around 75% had positive surprises in their earnings per share, and a further 80% experienced stronger sales. Overall S&P 500 earnings increased by 13.4% in the fourth quarter of 2017 compared with a year earlier. Sharps reckoned that the combination of further upside in the energy industry’s earnings, a weaker dollar and the reduction in the US corporate tax rate could keep spurring on earnings growth in 2018.
For Sharps, then, investors should hold on to their shares. ‘Given the strong market gains seen over the past year, it is understandable that some investors may wish to moderate their equity exposure at this point,’ he said.
‘However, trying to time the market by moving aggressively from stocks to cash and then back to stocks is very difficult, even for investment professionals. Failed attempts to time the market can hurt long-term investment performance in two different ways. By selling assets when they have lost some value and going to cash, investors essentially lock in those losses. In addition, investors run the risk of missing out on at least some gains when the market bottoms and starts to recover.’
An interesting test for the top managers in this category will be whether they can apply such buy-and-hold wisdom to the tech stocks that have propelled them up the performance table.
Amazon in its prime
The five management teams with the highest information ratios over the past three years have in common a significant allocation to technology stocks, with 40% to 45% weightings to the sector compared with the S&P 500’s 24% allocation. All five portfolios hold both Alphabet and Amazon among their 10 largest positions, and four also own Facebook in their top 10 – the exception being the White Oak Select Growth fund.
‘We believe the world is growing increasingly tech-intensive,’ explained AA-rated William Danoff, manager of the Fidelity Contrafund. ‘The fund emphasizes what we consider to be franchise companies in technology.’ He cited Facebook, Alphabet and Amazon as examples of this trend. ‘We believe these companies could continue to grow revenues from online advertising as consumers search the web more often from their smartphones.’
However, the A-rated pair of Jed Cohen and Timothy Wahl, who run the Investment House Growth fund, have pointed out that the technology label is ‘somewhat arbitrary’ given that its constituent stocks span advertising, e-commerce, branded goods and social media. They therefore regard technology as a ‘far more economically and financially diverse sector than the name would suggest.’