Transcripts

"Of Mutual Interest"-John Waggoner of "USA Today"

SUSIE GHARIB: Tonight's "Of Mutual Interest" commentator says there's a change underway in the mutual fund market with growth funds gaining favor. He's John Waggoner, mutual fund columnist at "USA Today."

JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: Everything goes in cycles. In the spring, the swallows return to Capistrano. In the summer, the Perseid meteor showers light up the heavens. And every 10 years or so, growth funds return to favor. This is one of those times. Stock fund managers fall into two camps: value and growth. Value managers look for beaten up stocks that will return to Wall Street's graces. Growth managers look for stocks of companies with potentially huge earnings growth. Value has been the winner for a decade. But now growth stocks are on the rally and there's a good reason for that. Growth stocks fare best when growth is hard to find. In a sluggish economy, investors adore the few companies whose earnings are soaring. The economy is probably starting to grow now, but few are looking for rip- snorting growth. And there's two very good reasons for that. The first is interest rates. When rates rise, borrowing becomes more expensive and it becomes harder for companies to borrow and expand. Short-term interest rates are currently zero or very close to it. So it's a good bet that rates will rise in the future and that could keep economic growth muted. Given the soaring deficit and the fact that taxes are their lowest in decades, it's likely that taxes will rise in the future, too. Although paying the debt is a good thing, rising taxes typically dampen the economy. And, in a rare alignment of investing, growth stocks are so cheap these days that even some value managers are looking at them. The drawback to growth funds: when they fall, they fall hard. But management styles often remain in fashion for five years or more. You won't have to wait until the next cycle to jump on. I'm John Waggoner.