Growth investment has had a terrible year. Morningstar, a fund tracker, estimates that the typical growth-oriented mutual fund would lose more than 30 percent in 2022.
However, growth stocks may be a good investment right now. Compared to Morningstar’s fair value assessments, growth stocks are now trading at a 20% discount. This does not rule out the possibility of stock prices falling. Investors should be skeptical of aggressive funds like ARK InnovationARKK +6.57 percent (ticker: ARKK), which gained 152 percent in 2020 and is down more than 50 percent in 2022, in today’s turbulent markets.
Investors who are unable to tolerate extreme volatility should take a more cautious approach to growth. Volatility statistics may be used to identify growth funds with reduced risk.
It is possible for a fund like MFS Massachusetts Investors Growth MIGFX +1.60 percent While the typical fund in Morningstar’s Large Growth category has a standard deviation of 20.9 percent, this one has a standard deviation of 17.8 percent. In other words, the MFS fund’s beta—a measure of market sensitivity—is 0.96, which indicates that if the market increases or loses 10%, it climbs or falls 9.6%. With a beta of 1.05, the typical large-growth fund rises and falls 5% more than the market on average. ARK Innovation, in contrast, has a beta of 1.73 and a standard deviation of 43%, making it far more volatile. In 2022, the MFS fund is down by 21.8%, outperforming 90% of its rivals, who are all down by 30% or more.
However, all of the volatility statistics have already been tallied. Understanding why a fund has been less volatile is critical, as is determining whether or not its risk profile can be sustained. Getting to the bottom of the manager’s approach is necessary. According to Jeff Constantino, a co-manager of Massachusetts Investor Growth, “We concentrate on holding high-quality, durable [earnings] compounders that we feel will have reasonably stable fundamentals even in adverse circumstances.” . Consequently, our preference is for firms with long-term sustainable competitive advantages, or broad economic moats, often with high-profit margins, [product] pricing power, robust balance sheets, and large cash-flow creation,”
Many defensive growth-stock funds focus on quality, which is certainly an imprecise concept. As Warren Buffett puts it, “economic moats” are a hallmark of high-quality companies. An advantage in today’s inflationary market comes from this company’s pricing control over its goods.
Brett Reiner, co-manager of Neuberger Berman GenesisNBGNX +1.18 percent, thinks that “for the most part, our firms should be able to improve pricing to offset [their rising] expenses” (NBGNX). “They’re the leading wholesale distributor of swimming pool materials in the U.S., with a 35 to 40% market share, multiples bigger than the next biggest competitor,” he says of Pool Corp. POOL +1.25 percent (POOL), is one of his major assets. Although Pool’s stock price would plummet by 34.5 percent by 2022, Reiner believes the company’s dominance will allow it to pass on additional expenses to consumers in the form of higher prices
There are few low-risk small-cap growth funds, and Neuberger is one of them. Alphabet (GOOGL) and Microsoft (MSFT) are examples of dominating blue-chip growing corporations with large moats (MSFT). It’s difficult to find a search engine that can match Google’s power.
Small businesses in a specialized market are Reiner’s target. Despite his preference for behemoths, he still owns 26.8% of his portfolio in technology. For him, the idea of going head-to-head with an 800-pound gorilla just isn’t appealing. Manhattan Associates ( NASDAQ: MANH), a company that delivers “mission important” supply-chain software at a reasonable price, is one of his investments.
Low-cost index ETFs with a concentration on wide-moat firms are available, but many lack a key risk-control component: a focus on value. As opposed to growth-at-any-price, most defensive actively managed mutual funds adopt a growth at a reasonable price (GARP) approach. Because of the recent rise in bond interest rates, this is particularly relevant at this time. That’s because bonds pay their dividends immediately, but costly equities promise long-term gains. Investors are less inclined to wait for a costly stock’s projected rise if the average bond yield is greater.
ETFs like VanEck Morningstar Wide MoatMOAT +1.50 percent (MOAT) or Franklin LibertyQ US Equity (FLQL) may be better investments than pure growth funds like Vanguard Mega Cap Growth since they consider both growth and value elements in their selection process (MGK). If you’re looking for an ETF that’s a little less volatile than Vanguard’s Mega Cap Growth ETF, you may want to consider the VanEck and Franklin funds.
There are a number of funds in the mutual fund industry that utilize valuation disciplines to manage risk, including Massachusetts Growth, Neuberger Berman, Jensen Quality Growth, Calvert Equity (CSIEX), and Janus Henderson Enterprise (JAENX).
Morningstar’s director of manager research, Russ Kinnel is a fan of Jensen Quality Growth’s performance. If the market or the recession takes another step down, he adds, “I’m still going to make [my investment] back because there’s some solid defensive qualities here,” although it may still be affected by its tight quality and value discipline.
Controlling risk isn’t the only thing you can do. Capital Advisors Growth (CIAOX) normally keeps a little amount of cash in its portfolio—11 percent as of March 31—as a precautionary measure. In 2022, it will be decreased by 19.9 percent. It’s possible that PTNQ — the Pacer Trendpilot 100 — might become fully liquid if things get tough.
Of course, if you’re sitting on cash at the bottom of the market, you’ll miss out on a lot of potential gains when the market recovers. To play growth stocks today, you must be ready to tolerate the possibility of some discomfort, albeit preferably not to the point of discomfort.