Value's in vogue as growth funds falter

Value investing has never been the belle of the financial ball. It can seldom be called glamorous, earth-shaking, or dazzling.

But when you are the No. 1 debutante on the dance floor - as value now is - who cares about glamour contests?

Put simply, "value" is where the money is being made.

While most market indexes have fallen this year, most that measure value funds are up. For example, as of Dec. 15, the small-cap value index put out by financial services firm Lipper Inc. is up 8.9 percent for the year; its mid-cap value index is up 4.2 percent; only the large-cap value index is in negative territory, down 1.4 percent.

Meanwhile, all three of Lipper's growth indexes dive into negative territory. And the stock market as a whole, as measured by the Dow Jones Industrial Average, or the Nasdaq Composite Index, is down sharply, more than 9 percent for the Dow, and almost 35 percent for the high-tech-oriented Nasdaq.

Value funds did take a hit during the recent market turbulence. But they weathered the storm far better than their main rival. The No-Load Fund Investor value index, for example, was down 3.3 percent in November. But the counterpart growth index was down 15.4 percent that month.

Value and growth investing are the two main polar opposites of the investment field. Growth investing refers to buying companies with fast-rising revenues and profits, most of which are invariably reinvested within the company. Dividends tend to be relatively unimportant. Price-earnings ratios tend to be quite high. Little surprise that many growth funds include technology companies.

Value investing, by contrast, is based on buying less-expensive, downtrodden companies with low price-earnings ratios. Many pay dividends and are considered slow but steady performers in terms of revenue and earnings growth. Value firms are often old-line traditional companies found in America's industrial and manufacturing heartland.

"The era of momentum-technology investing is over," says Martin Whitman, manager of the Third Avenue Value Fund.

"The only time growth works is in a period of speculative excess, such as from 1996 to 1999," he argues. "But value never really went away. It's just that value can't compete when the inmates [from the growth community] are running the financial markets."

Growth investing, Mr. Whitman says, is based on being "outlook-conscious" (looking ahead for further expansion) as opposed to being "price-conscious." Today, he reckons, price - against the backdrop of a slowing, moderating economy - is once again a primary criterion for picking a productive stock.

"The trend towards value investing is likely to continue right into the year 2001," says Tim O'Grady, manager of the Evergreen Select Strategic Value Fund.

Mr. O'Grady sees several major economic factors at play, all helping to boost value funds:

* Profit growth is slowing, which can put value firms at a competitive advantage against many growth firms.

* Federal Reserve interest-rate tightening has begun to work, slowing the economy into a relatively soft landing, without a recession.

* Energy prices continue to remain at levels higher than in recent years, benefiting many smaller value-oriented energy firms.

Is there a case for investing in any one segment of value investing as opposed to others - such as small-cap vs. mid- or large-cap?

O'Grady's fund, for example, tends to have a large-cap orientation. But he believes that "diversification is the key." Funds, and individuals, should invest in a mix of solidly performing value companies, irrespective of their market capitalization, he says.

In his case, for example, he likes selected natural-gas firms, financial companies that are delinked from the credit cycle (since many corporate and individual accounts are maxed-out and somewhat vulnerable to a slowing economy), and healthcare firms.

Still, John Schneider, manager of the PIMCO Renaissance Fund, a mid-cap fund, sees greatest potential gain occurring at the mid-cap level.

Mr. Schneider agrees that value is here to stay for a while. Traditionally, he notes, value and growth have tended to alternate in terms of marketplace dominance, one style "up for about 2 years, followed by the other [style] for around two years," and then vice versa. The recent six-year dominance of growth was an anomaly, he says, that likely will not be repeated.

But within value, Schneider likes companies with low price-earnings ratios in the mid-cap arena.

One drawback, he says, is the possibility of "a harder economic landing" than has been expected, including "the possibility of a recession." Were that to occur, adds Schneider, forget traditional divisions between large-caps, small-caps, and mid-caps. Rather, he says, a person has to be very selective. Look for firms (and mutual funds) that can withstand economic shocks, yet still post gains.

(c) Copyright 2000. The Christian Science Publishing Society

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