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ERROR: type should be string, got "https://www.barrons.com/articles/growth-vs-value-more-divided-than-ever-1521250404\nGrowth vs. Value: More Divided Than Ever\nLewis Braham\nThe ideological divide between growth and value funds managers today seems as wide as that found in U.S. politics.\n“We don’t own Amazon.com because we can’t justify its valuation on cash flow, earnings, book value, sales revenue, you name it,” says Bill Nasgovitz, manager of the $786 million Heartland Value fund (ticker: HRTVX). “It just doesn’t fit.”\nOn the other side of the aisle is mid-cap growth fund manager Michael Lippert, who has a 7% weighting in Amazon (AMZN) in his $308 million Baron Opportunity fund (BIOPX). Value investing is a lost cause in today’s high-tech, winner-take-all economy, according to Lippert. “The world we live in today—it’s haves and have-nots, and there are way more have-nots,” he says. “There are so many industries being disrupted by the digitization of the world; it’s hard to make cyclical bets on have-not value stocks.”\nThose conflicting viewpoints have led to a stark contrast between the valuation of Baron Opportunity’s and Heartland Value’s portfolios—and their respective performance. According to Morningstar Direct, Baron Opportunity’s stocks have an average trailing 12-month price/earnings ratio of 42, compared with Heartland Value’s seven. Baron Opportunity’s 14.2% five-year annualized return crushes Heartland’s 7.1%. Small wonder, as market darlings like Amazon, Alphabet (GOOG), and Tesla (TSLA) dominate Lippert’s portfolio.\nThis is hardly an isolated example. A screen of Morningstar Direct’s database reveals similarly wide gaps between the U.S. stock funds with the highest and lowest valuations. (Funds had to have above-average or below-average valuations relative to their category peers on four valuation metrics to pass the screen.) The median P/E for the 50 highest-valuation funds was 37, versus 14 for the lowest-valuation funds. Of the funds with five-year records, the high-valuation growth funds returned 16% annualized, compared with 11% for low-valuation ones. The current P/E for the Standard & Poor’s 500 index is 26; its long-term historical median P/E is 15.\nDOES THIS INDICATE that we’re due for a value comeback? If the threat that sparked the most recent February market correction—inflation and rising interest rates—proves legitimate, the answer is yes. For years, we’ve been in a slow-growth, low interest-rate economy, making investors willing to pay a premium for fast growth. But if the economy heats up, cyclical sectors that value investors favor should do well.\n“We now have our highest weighting in energy stocks since I joined the firm in 1996,” says manager Stan Majcher of the $1.9 billion Hotchkis & Wiley Mid-Cap Value fund (HWMAX), which has 23% in energy and a trailing P/E of 13.8. “One of the opportunities in the market today is the companies that do well with higher inflation and interest rates are trading at a discount to the stocks that do poorly. Energy has historically done fairly well with inflation.”\nLippert, who has 4.1% of assets in electric-car maker Tesla, thinks otherwise: “Of course, you may have inflation that will have a positive impact on oil, but over the long term, oil’s going to be really challenged. The way we drive and the way we power industries is going to change substantially.”\nCounters Majcher: “To replace the existing auto fleet takes a very long time.” He points out that, at today’s oil prices, the companies he invests in are already profitable, “yet there are tech companies trading at enormous valuations, and all of their growth needs to come in the future.”\nWhat’s more, in the inflation/rising-interest-rate scenario, stocks with high valuations would also suffer from comparisons to bonds that will be yielding more after each rate increase. Such comparisons are done by inverting a stock’s P/E ratio to calculate its current “earnings yield.” If 10-year Treasury yields jumped from their current 2.9% to 4%, a stock with a 50 P/E, or 2% earnings yield, doesn’t look nearly as attractive as the 10-P/E stock with a 10% earnings yield.\nMORNINGSTAR’S STAR RATINGS, which are based on a fund’s historical performance, could become less meaningful at such style-flip inflection points. “We’re big believers in ‘past performance isn’t indicative of future results,’ ” says Todd Rosenbluth, director of ETF and mutual fund research at CFRA. “What’s going to drive a mutual fund in 2018 and beyond are the underlying stocks, so we connect our stock coverage universe with fund holdings.”\nCFRA’s fund star ratings are determined using a mix of performance and the firm’s ratings of portfolio holdings. So, a fund like the $134 million Aegis Value (AVFAX), which has two stars from Morningstar, gets four from CFRA because analysts like its underlying stock valuations.\nMorningstar has a separate, qualitative medal-based ratings system—Negative, Neutral, Bronze, Silver, and Gold—that takes valuation into account. For instance, despite having a two-star performance rating, Hotchkis & Wiley Mid-Cap Value receives a Bronze from analyst Kevin McDevitt, who acknowledges that its style has been out of favor. Meanwhile, McDevitt recently downgraded Touchstone Sands Capital Select Growth (TSNAX) from Bronze to Neutral, stating as one reason that the fund’s “average P/E ratio is among the large growth Morningstar Category’s 10 highest.”\nIn the ninth year of history’s second-longest bull market, such qualitative assessments are vital to understand.\nEmail: editors@barrons.com\nThe valuation difference between growth and value funds indicates a value comeback"