The beginning of the calendar year is a popular time for investors to take a look at new investment ideas to boost portfolio returns. Growth funds are a perennial favorite for those looking to participate in the next big thing, as they include companies that have higher-than-average prospects for sales and earnings growth. They are perceived as poised for growth perhaps because they are in a young and dynamic sector of the economy (like many technology-related sectors) or because they have just completed a major organizational turnaround or restructuring, and are expected to bounce quickly out of a recent downturn. Growth investors often employ a valuation metric called Price Earnings to Growth (PE/G), which reflects how the current price-to-earnings ratio relates to the company’s long-term growth prospects. A low PE/G can indicate that a company’s stock price has not fully factored in its earnings potential. This can be a strong buy signal, especially for those investors who seek Growth At a Reasonable Price (GARP).
Jem5 Investor: Alex Borodin Each Jem5 article identifies the five mutual funds which are the best match for specific types of investors – given their goals, risk profile and other preferences. Alex is this week’s Jem5 investor. He is recently out of college and works as a programmer for a technology company in a major urban area. Alex has just opened a retirement account and is beginning to make decisions about his portfolio.
Alex considers himself to be a prudent risk-taker. He is interested in maximizing the potential for growth over what he assumes will be a long time horizon to retirement. But he does not go out of his way to take risks with little chance of paying off. He believes that despite the current economic problems, the US economy will continue to grow and that growth will be led by innovative companies at the leading edge of the curve in technology-related disciplines. For this reason, he decides to allocate a meaningful portion of his equities portfolio to growth stocks, with a focus on the large cap names that can sustain performance over long business cycles.
Alex sets up a Jemstep account and inputs his investment goals, as well as his preferences for return/risk characteristics, sensitivity to fees, tax considerations, income needs, and other important factors. Jemstep sifts through the universe of US Large Cap Growth funds, taking into account over seventy attributes of every fund to find the funds that are the best match for Alex. Here is snapshot of what Jemstep recommends:
Best US Large Cap Growth Funds for Alex Borodin:
The Jemstep Recommendation for US Large Cap Growth Funds:
The Jemscore represents how well a fund fits your specific investment goal and time horizon for achieving it, preferences, and other profile information. The higher the Jemscore out of a high of 100 the better the fit. Historically, growth stocks have not performed as well over many time horizons as value stocks. But in the last handful of years, that dynamic has changed and the leading growth stocks shown here have all demonstrated performance advantage versus the benchmark S&P 500.
Other Metrics for Comparing US Large Cap Growth Funds
Alex does a deeper dive into the different attributes of the funds provided by Jemstep and sees that the growth stock funds as a whole tend to be riskier than the S&P 500. That is to be expected – these funds earn more of their value from capital appreciation and less from dividends. So year-to-year returns can be commensurately more variable. Since Alex is investing over a long time horizon, he is willing to tolerate more short-term variability in pursuit of long-term goals. He also notices that among the recommendations there are some specialty funds. For example, the Parnassus Workplace Fundfocuses on investing in companies that offer attractive work environments for their employees (on the assumption that happy employees may generate greater productivity). For the purposes of his portfolio, Alex prefers to focus on broadly diversified growth stocks across a variety of industry sectors with fees that are not unreasonably out of line with peer averages. He likes the fact that the Touchstone fund, rated as number one, has a solid record of outperformance against the benchmark for the 3, 5 and 10 year periods. In the end, Alex decides to go ahead and add the Touchstone fundPTSGX to his portfolio.
What’s your Jem5? Visit Jemstep.com and see what funds are the best according to your own goals and preferences.