Investors in US equities should consider employing both growth and value styles in the current environment, particularly given the unexpected swing last year, according to T. Rowe Price manager Jeff Rottinghaus (pictured). 
The manager of the five FE Crown-rated T Rowe Price US Equity fund said backing one style over another could result in some investors losing out on performance.
He said: “Investors often emphasise one of two investment styles within their portfolio: growth stocks or value stocks. Each approach has its merits.
“However, history shows that predicting long-term outperformance of one style over the other can ultimately result in a hit or miss strategy.”
Indeed, the swing from growth to value last year caught out many fund managers who struggled to outperform benchmarks.
The average IA North America fund returned 29.31 per cent last year compared with a 32.67 per cent gain for the blue-chip S&P 500 index.
Rottinghaus noted that last year’s swing was driven by rising energy prices and the reflation trade, spurred on by Donald Trump’s promises during the US presidential campaign.
But that trend has been reversed in 2017, as the below chart shows, with investors preferring growth stocks instead.
Growth vs value over 10yrs
Source: FE Analytics
The manager said: “Growth investors are typically drawn to companies with high expected growth, often accompanied by high valuation multiples.
“Examples of such growth companies would include Amazon.com, Priceline, and Facebook. These are market-leading stocks that have high valuations and expectations, but justifiably so, in our view.
“We like their potential to continue to compound earnings and reach higher profit levels for several years.”
Yet, while the growth style has delivered strong returns over long time frames, value stocks can often offer investors attractive entry points to strong businesses.
Rottinghaus added that value-focused investors tend to be drawn to companies with lower growth expectations and less demanding valuations, giving bank Wells Fargo, utility firm Southern Company and property/casualty insurer XL Group as examples of current value opportunities.
He added: “Often the market may be overly concerned about short-term headwinds that certain companies face, resulting in undervalued stocks.
“But for a long-term investor, these undervalued businesses can feature strong fundamentals and room to flourish once the short-term headwinds recede.”
However, a blend of both approaches offers greater flexibility for investors, according to the manager, and help prevent investors from taking on too much risk.
The manager argued that a “balanced” exposure to the full range of the US equity market can stop investors from attempting to time market swings between growth and value leadership, minimising the chances of making a mistake.
“From a historical perspective, long-term value investors have achieved superior returns over growth investors, and with lower overall risk,” he added.
“However, this knowledge would have served investors poorly over the past decade, as growth stocks have outperformed value.”
Performance of indices over 10yrs
Source: FE Analytics
As the above chart shows, the Russell 1000 Growth index has returned 262.3 per cent over 10 years, in sterling terms, compared with a 162.22 per cent rise in the Russell 1000 Value index.
The manager said: “With strong individual stock performances historically coming from both ends of the investment spectrum, we believe it makes sense to maintain a diversified US equity exposure.
“Investors who limit themselves to only one investment style could be leaving money on the table.”
He highlighted the e-commerce stocks as examples of a strong performing, growth sector with rapidly growing companies. Elsewhere, the airline sector had been a “surprising” value play, where consolidation in recent years had contributed to stronger performance.
Unlike other commentators who have cooled expectations of further growth for US stocks, Rottinghaus has tipped the US bull market to continue.
“While we are not expecting a sharp correction in US equity markets, neither are we anticipating a dramatic acceleration in global economic activity,” he noted. “Current valuations are indisputably elevated, but there are also reasons to be constructive.”
The $407m T. Rowe Price US Equity fund typically focuses on large-cap stocks with Rottinghaus constructing a diversified portfolio with the aim of long-term capital appreciation.
The manager said his strategy invests in both value and growth stocks to generate strong returns for long-term investors.
He explained: “The diversified US equity exposure within the fund combines value stocks that display credible paths toward improvement, as well as high-multiple, high-expectation growth companies whose long-term potential, we believe, remains underestimated by the market.
“Such a broad approach helps to ensure participation in any market advance and could mitigate declines during a market pullback.”
Rottinghaus added: “Some of the holdings that represent our best ideas have a bias toward a recurring revenue model, as we believe that investors appreciate the earnings predictability and good free cash flow generation from these types of businesses.”
The largest position in the fund is a 3.7 per cent holding in bank JP Morgan Chase & Co. It also holds 3.4 per cent of the portfolio in healthcare equipment & supplies business Becton, Dickinson & Company, while bank Wells Fargo rounds out the top three, representing a 3.2 per cent holding.
Among the top 10 include Google parent Alphabet, tech giants Apple and Microsoft, oil company ExxonMobil and payments provider Visa.
As reflected by the top 10 holdings, IT and financials represent the largest sector positions in the portfolio, making up 19.5 per cent and 17.2 per cent respectively. (It should be noted, however, that IT is also the manager’s largest underweight sector). The fund also holds 16.5 per cent of the portfolio in healthcare stocks.
Performance of fund vs sector & benchmark since June 2009
Source: FE Analytics
Since Rottinghaus took over the fund in June 2009 it has returned 284.87 per cent, slightly behind the 299.92 per cent gain for the S&P 500 index, although it has outperformed the average IA North America sector peer’s 247.78 per cent rise.
The fund has an ongoing charges figure (OCF) of 0.82 per cent.