Growth funds are back

You can divide management styles into two broad camps: value managers, who look for underpriced and unloved stocks, and growth managers, who look for stocks of companies whose earnings are about to soar.

Growth funds flamed out spectacularly 15 years ago as the dot-com bubble went burst. Growth had been so successful for so long that managers seemingly forgot that, sooner or later, companies had to actually have earnings, and many technology darlings were little more than a couple of guys and a few laptops.

In the wake of the tech wreck, value managers rose to the top: There were plenty of solid companies whose shares had been neglected because they weren't tech. But in the past five years, growth has regained the upper hand: Large-company growth funds have gained an average 14.4% a year, vs. 12.8% for large-company value. And so far this year, large growth is up 3.5%, while large value is down a fraction of a percent.

Dave Hollond, chief investment officer for American Century, says it's not getting harder to find good growth ideas, even six years into the bull market. "People forget that the economy has been improving for years," he says. "We're the envy of the world, but people think we're still in the financial crisis."

Technology is, once again, the center of attention for growth managers. "Tech is a big part of what we do," he says. "What we like in technology is the software and communications equipment that provides network security. Consumer and government data (are) very vulnerable to cyberattacks, and it's a board-level issue: Executives who don't respond adequately lose their jobs."

For Hollond, that makes companies like Cisco (CSCO), Juniper Networks (JNPR), FireEye (FEYE) and Palo Alto Newtworks (PANW) look attractive. The companies are growing in customers and earning more revenue per customer. "That's a nice combination," he says.

Grant Bowers, manager of Franklin Templeton Growth Opportunities, thinks there are good growth opportunities in consumer discretionary stocks – stocks of companies that profit from when people have a bit more money in their pockets. "We're seeing improving employment, a bit of wage growth, and lower gas prices should put a bit of a tail wind to consumer spending," he says. And that means good growth prospects for apparel companies, restaurants and theme parks. "At Disney (DIS), the theme parks are doing well, music is doing well, as are media assets like ESPN."

Another growth area is industrial companies, Hollond says. "We like non-residential construction," he says. After the financial crisis, the sector's earnings went negative until 2011. But things are picking up. "Vacancy rates are falling, they command strong rental rates, and it's likely spending on construction will continue," he says. And that's good news for companies that produce raw materials, such as concrete and industrial lighting.

Growth tends to attract high prices, which often translates into "high risk." Billionaire investor Mark Cuban has warned about high prices for tech startups, something that Bowers says is worth worrying about. "In the private, pre-IPO market, there's a lot of hype and big valuations applied to companies," he says. "People put a lot of hope into those valuations."

But the lingering risk aversion to large and midcap growth companies works to a manager's advantage, he says. "If growth is out of favor, we can get stocks of great companies at good prices."