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By Christine Benz and Shannon Zimmerman | 07-05-2012 01:30 PM

Despite a Rocky Market, Fund Investors Go for Growth

Though performance has been volatile this year, investors have thus far been willing to bet on growthier areas of the stock and bond markets, says Morningstar associate director of fund analysis Shannon Zimmerman.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

Nearly every mutual fund category is in the black for the year-to-date, but it definitely hasn't been a straight line up.

Joining me to discuss some recent trends in mutual fund performance is Shannon Zimmerman. He is associate director of fund analysis for Morningstar.

Shannon, thank you so much for being here.

Shannon Zimmerman: Good to be with you, Christine.

Benz: Shannon, let's start with domestic equity. It's been a volatile year so far.

Zimmerman: It sure has.

Benz: The second quarter was particularly volatile, although June was a great month. Let's discuss the key trend when you look at growth versus value-oriented funds. What are you seeing there?

Zimmerman: On the valuation spectrum there is a definitive trend line, and growth has outperformed value pretty handily--not by a wide margin--but pretty consistently as well, and it's interesting because over the very long period of market history, from 1926 through present, value has typically outperformed, but Jack Bogle did a speech at a Morningstar conference a few years back called the telltale chart, and he pointed out that if you remove just slivers of that time series, the value premium seems go away. So maybe this is one of the slivers where growth is going to outpace value for a while, and it's going to be on valuation grounds, because it's been out of favor for a while.

Benz: So, when you look at why growth has performed so well, what do you conjecture about why investors have preferred growth stocks at the expense of value names recently?

Zimmerman: It's a really good question. You look at it from the level of government on down to individual investors, and now it's not exactly austerity be gone, but folks are talking more about concern for GDP growth, or growth in general, than they are inflation.

Investors may be taking that as a sign as well: If people are going to step on the gas and even Britain, which has been sort of a champion of austerity for a while, is stepping on the gas with a round of quantitative easing, maybe investors have been anticipating that. Maybe they are just more open to risk because the valuations appear quite attractive. I did a panel at the recent Morningstar conference on tech, and a lot of value investors are going into that traditionally growth sector because the valuations look so compelling relative to the health of the balance sheets of the major companies in that sector. Lo and behold, technology has been one of the best-performing sectors this year, and that makes sense given that growth has done so well.

Benz: When you look across the capitalization spectrum, any notable trends there in terms of large, mid, and small-cap funds?

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