Beware of Rising Valuations

This article was originally published in the October 2017 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.

The current bull market is the second longest in history, and the S&P 500 advanced 18.7% annually from March 9, 2009, through October 2017. Plus, mid- and large-cap major growth indexes gained about 1.4 percentage points more than the S&P 500, annualized, from March 2009 through October 2017.

Given the market's climb, it's not surprising that many funds' valuation multiples have reached or exceeded pre-financial-crisis peak levels. Some managers argue that high valuation multiples make sense in a low-interest-rate environment. Others are willing to pay premium prices for what they consider to be high-quality companies. Some think valuation just doesn't matter much when growth potential is huge. Each case has merit, but history shows that occasionally there are sharp corrections in stocks with the highest multiples. Probably the most dramatic case was the 2000-02 bear market when sky-high tech stock valuations were crushed and the Nasdaq 100 lost about 75% of its value.

We've highlighted four growth funds with lofty valuations as of September 2017. The funds have a history of investing in stocks with above-average price multiples, but the differential between the fund's average and the benchmark has widened recently.

The managers at

Neutral-rated

The managers at Bronze-rated

Mid-cap growth fund