Value funds aim to prove they're still players

Managers of value funds are not a happy lot professionally these days. Their funds are not giving shareholders a good return.

"I have been suffering," admits Richard Dahlberg, manager of Pioneer II, a Boston-based fund that invests in stocks selected according to "value" rather than "growth."

"It has been a tough year for value managers," sighs Susan Byrne, manager of a group of Gabelli Westwood funds out of Dallas that are value oriented - seeking stocks that are cheap or downtrodden when such fundamentals as the price-to-earnings ratio and other financial factors are considered.

Last summer, Pioneer II, with $5 billion in assets, sent shareholders a letter trumpeting the "comeback of value."

Though there was a small resurgence of value stocks in the first half of 1999, it didn't last. Pioneer II shares were up only 1.6 percent last year. That's hardly a stellar performance. It compares with the broad Standard & Poor's 500 index, up 19.5 percent in 1999, or even worse, the Nasdaq Composite, up 85.6 percent.

Investors have noticed.

There has been a swoosh of money out of some value funds to more exciting venues. After all, the average return on the hundreds of value funds last year was only about 5 percent last year for those invested in large companies, under 2 percent for those invested in small value stocks.

And some of those value funds with better performance "cheated," putting technology stocks in their portfolios which would not be considered value stocks by true believers.

Legg Mason Value performed so well it got five stars from Morningstar, the Chicago fund rating service, but 34 percent of its portfolio is in technology stocks, including Internet stocks.

"It's not a value fund in any way we historically equate it," says Mr. Dahlberg

The pattern of money piling into expensive stocks and making them even more expensive has lasted for a few years.

But hope springs eternal in the hearts of value managers. "It's the long-term that matters in investing," Pioneer II told its shareholders last summer.

"We understand that the value style may go in and out of favor from time to time, but its worth is proven when you view the results over long periods."

Dahlberg, who has been a money manager for more than three decades, points to some of the investment fads of the past. There was Boston's Route 128 technology stocks in 1960. "By the end of 1961, no one wanted to admit they owned them."

In the 1970s, some computer, semiconductor, and disk-makers went in and out of favor.

In 1983, investors enjoyed - briefly - a surge in small technology stocks. In 1987, it was bigger technology stocks.

Speaking of the present boom (or at least until last week) in Internet and technology stocks, Dahlberg comments: "We have been through these phases before.... There is no way people are going to get even on some of these stocks." Some stocks, he notes, are selling for 100 times company sales - not earnings.

"Everybody is jumping on the momentum bandwagon," Dahlberg says. But he promises himself that he will stick to his value-picking discipline. He recalls the late 1960s and early 1970s when growth stocks did better than value stocks. But for two decades after 1973, value stocks came out ahead.

Dahlberg sees a possibility that with economic recoveries in Asia and the rest of the world, stocks of some "old" companies will pick up as their earnings look better. He mentions Freeport Mcmorran Copper & Gold and Mississippi Chemical.

"You are seeing some pops" on the stock charts, he says.

"Eventually the market will come around to our style again," he says. "It always sounds worst right near the bottom."

Ms. Byrne also expects the market to turn away from the "mega-caps" - the 50 or so stocks of major companies that have accounted for most of the rise in the major price indexes.

"Everything is there for a rotation to value across-the-board," she says. And she detects the start of new interest in middle- and small-size companies.

Shares in Gabelli Westwood Equity, with $198 million in assets, were up 14.7 percent last year, putting it in the top 10 percent of value funds.

"The value style is very undervalued at the moment," Byrne says. "I hope people don't lose patience with us."

(c) Copyright 2000. The Christian Science Publishing Society

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