Value style funds look for cheap stocks that are out of favour with the market, with the aim of riding the share price higher once the market revalues the stock and demand for its shares rises.
Value funds seek to invest in quality stocks that are unloved by the market, and therefore undervalued, whereas growth funds choose stocks on the basis of their ability to increase earnings.
According to the value-versus-growth literature, you should hold a mix of value and growth-style managed funds. That's because good times for growth should correspond with bad times for value, and vice versa.
The problem with labelling funds according to value and growth is that fund managers operate with varying investment philosophies, and stocks that were once considered value stocks can all of a sudden become growth stocks. For example, when BHP Billiton's shares were sitting at $13 many years ago, it would have been regarded as a value stock. But during the resources boom its shares soared to $40 or more, placing it in the growth category. Does this mean that a value fund manager who purchased shares in BHP Billiton at $13 should sell as the share price climbed higher during the resources boom? If they believed the shares were no longer undervalued, the answer is yes. But while some value managers act in such a manner, others don't.
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