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By Christine Benz and Shannon Zimmerman | 10-10-2012 03:00 PM

Large-Growth Stocks Still Have Room to Run

Fears of past market crises have investors selling the category despite its wide margins of safety and outperformance over its blend and value counterparts, says Morningstar's Shannon Zimmerman.

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Christine Benz: Hi, I am Christine Benz for Large-cap growth stocks have been on a tear recently, but fund investors have been shunning the sector. Joining me to discuss that phenomenon is Shannon Zimmerman. He is associate director of fund analysis for Morningstar. Shannon, thank you so much for joining me.

Shannon Zimmerman: Good to be with you, Christine.

Benz: So, let's talk about large-cap growth stocks and funds they've really been leading the way.

Zimmerman: That's right.

Benz: What in your view has been driving that level of outperformance? And is that typical of what we would expect during a period of economic recovery like what we seem to be going through?

Zimmerman: To your first question, most of the fund managers who I cover are sort of value specialists, but they're also gravitating toward growth stocks, as well, which you can sort of back your way into what might be going on. If investors like Bill Nygren of Oakmark Funds, who is a very successful value investor over the long haul, has a preponderance of assets in one of his funds--Oakmark Select--in the large-growth square of the Morningstar Style Box, that probably suggests that he is seeing bigger gaps. And I should say from the outset that he doesn't do any top-down investing at all. But he is backing his way into a substantial stake in that part of the style box because that's where he is seeing the widest margins of safety. He's always looking for discounts there, and as at other value shops, as well, discounts between the market's price that's been assigned to a company, and then what [the fund managers] think that the company is actually worth.

So, why would that be? And if you look at the three-, five-, and 10-year trailing periods, right now large-cap growth actually holds sway over the large-blend and large-value stocks, which for investors of a certain age, who remember large growth being an underperforming category for so long, might come as a surprise. It's still an underperforming category over the 15-year period and that kind of go-to-the-value proposition. If you think the mean reversion is going to have impact at the level of fund style, there is a way that large-growth funds tend to catch up to the large-blend and large-value categories because still over that 15-year period, it's an underperforming category.

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