Large Cap Commentary – April 2014
In March, the performance of the Russell 1000® Growth Index and the Russell 1000® Value Index broke from one another and the net result was a 500 basis point (or 5% swing) between the two indices. Value bested growth and this spread continued throughout April. The graph below depicts the variance in performance between growth and value.
There are two principle reasons given for the performance difference between the two indices. The first is the recent selloff in high flying stocks after a strong upward run in price. The second is the confidence of a majority of investors who believe the economy is improving, making cyclical value stocks more attractive. A cyclical stock is one whose price is affected by the ups and downs of the overall economy.
The first explanation, the selloff, can be characterized as a “risk off” reaction. In other words, investors’ risk tolerance declined and, accordingly, they sold what they considered to be relatively expensive stocks. If you recall last month’s commentary, I mentioned that we trimmed some of our better performing holdings precisely because of the jump in their stock prices of late.
The latter reason, the acceptance on the part of the average investor that the economy is improving, thus making cyclical value stocks more attractive, seems to contradict the theory of the “risk off” trade. While it makes sense that investors would shift from growth stocks to more cyclical stocks as the economy improves, it is hard to justify that change if investors are becoming more nervous about the direction of the economy.
Therefore, we are left with a paradox. Fortunately, the current situation is not unusual in the short-term for equity markets. However, it is in these moments that some investors try to “time the market” or make quick trades by buying or selling.
At Argent, we do not attempt to time the market. Instead, we take a long-term, measured approach to investing. We react when we identify a change within the fundamentals of a company we own. We also react when we recognize an improvement or decline in a stock which affects our theory of favorable odds. This can put us at a variance to the market of the moment. However, we believe that fundamentals drive stock prices and that our disciplined investment process can point us to compelling investments opportunities for our clients.
As always, we appreciate your interest in Argent Capital Management.
Ken Crawford , Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. Past performance is no guarantee of future results.