ASG - ASG: Now Is Not The Time

2023-08-02 15:26:34 ET

Summary

• The Liberty All-Star Growth fund adopts a "fund of funds" approach, employing three distinct managers.
• The fund is principally invested in equity positions, and its composition varies depending on the current market environment.
• Given current market risk factors I keep highlighting as it relates to a potential credit event and the fund's valuation metrics, it's challenging to envision a scenario where ASG thrives.

The Liberty All-Star Growth Fund (ASG) adopts a "fund of funds" approach, employing three distinct managers to oversee different segments of its portfolio. This creates a diversified, multi-managed portfolio, providing investors with broad exposure to growth-oriented stocks.

The fund is principally invested in equity positions, and its composition varies depending on the current market environment. For instance, ASG's portfolio has a higher allocation to technology compared to the Liberty All-Star Equity Fund ( USA ). This is because ASG falls in the "Growth Equity" category, and the technology sector has shown explosive growth over the past decade.

However, it's worth noting that the fund's composition also poses certain risks. For instance, the fund's relatively high exposure to mid-cap stocks has proven detrimental in the past year. Mid-cap stocks have not performed as well as their large-cap counterparts, leading to a lag in ASG's performance.

Dissecting the Fund's Performance

The fund's performance is influenced by market breadth. If the market breadth continues to be narrow, with only a few large-cap stocks driving returns, ASG may continue to underperform the S&P 500 ( SPY )

The Role of Valuation Metrics

A closer look at ASG's valuation metrics reveals another potential cause for concern. The fund has a stretched portfolio P/E ratio, which is above both the category average and the index level. Similarly, the P/B and P/S ratios are on the wide side.

Such stretched valuation metrics could limit the fund's growth potential in the current environment of rising interest rates. In a low-interest-rate environment, growth tech stocks with low profitability performed well as investors chased the sector due to lack of alternatives. However, with bond funds now yielding close to 6%, the investment landscape has changed.

The Future of ASG: Predicting the Next Move

Predicting the future of any investment fund involves a degree of speculation. However, given current market risk factors I keep highlighting as it relates to a potential credit event and the fund's valuation metrics, it's challenging to envision a scenario where ASG thrives in the short term. If we were to see a sustained widening of market breadth, this might improve ASG's prospects, but such a scenario seems unlikely at present.

Conclusion

The Liberty All-Star Growth Fund offers a diversified approach to growth investing. A significant pull-back might make the fund more attractive, but until then, it may not be the best choice for investors seeking robust long-term results. Ultimately, like any investment decision, investing in ASG should align with the investor's risk tolerance, investment goals, and market outlook. I don't see much of a reason to really favor this fund over others aside from the internal weightings being fairly even, but I'm just broadly negative on equities for the next three months here and I think there are better alternatives.

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