In '97, Defense Is Good Offense

'Value' style of investing outpaces 'growth' in the hot small-cap sector

Neil Eigen, like many mutual fund experts, now urges American investors to think "value."

Admittedly, Mr. Eigen has a vested interest. He manages two new value funds from J. & W. Seligman & Co.

But Eigen's message goes beyond the status of his own funds - one of which is up 36 percent this year.

Independent research indicates that in down markets, value funds tend to slide less than other types of mutual funds. With market indexes hitting historic highs, and some analysts fretting about a downturn, owning a fund that keeps a close eye on the underlying value of its stocks looks like a shrewd defensive strategy, experts say.

On a "bad day for the market, we'll lose only a small part of the downside," says Tony Hitschler, president of Brandywine Asset Management in Wilmington, Del., which "value manages" $7 billion.

"Eighty percent of the performance in down markets comes from value mutual funds," says Eigen. A value fund might lose money, along with the market as a whole. But typically, Eigen says, "value funds lose less money in a down market than non-value funds."

And even with markets rising, the value style has been good to investors this year (see chart).

The strategy has worked particularly well for funds that invest in small and mid-size companies - so-called small-cap and mid-cap funds.

Through Sept. 12, small-cap value funds have gained 28 percent this year, according to Morningstar. Mid-cap value funds earned 24 percent, and large-cap value funds grew by 23 percent. For the same period, the S&P 500 rose 24.73 percent.

A value investor seeks companies whose stock price is undervalued compared with those of similar companies. A common way to find them is to look for lower than average price-earnings ratios (share price divided by earnings per share).

The other main style, growth, looks for fast-growing earnings, and mutual fund investors cling almost theologically to one style or the other.

"Value funds are less risky and less volatile than growth funds," says Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter based in Irvington-on-Hudson, N.Y.

"What is difficult is trying to time the market as to when to buy value funds or growth funds, and when to sell them," says Mr. Jacobs. His solution: Own one of each.

Sometimes, as is now the case, both value and growth perform well. Growth appears to be beating value this year in the large-cap sector.

The Wilshire Large Cap Growth Index is out front at 25 percent through August 31, compared with 19 percent for the Large Cap Value Index. The Wilshire Mid Cap Value Index is up 20 percent versus 17 percent for the mid-cap growth. The Wilshire Small Cap Value Index is up 22 percent, compared with 20 percent for small-cap growth.

"If you want high dividend yields and price appreciation over time, a value investment" makes sense, says Tim O'Grady, who runs the value department of First Union Bank.

Mr. O'Grady, who oversees value-linked investments of $1.2 billion, notes that for the five-year period ending Aug. 31, his bank's main value trust fund returned 23 percent, versus about 20 percent on the S&P 500 index.

Value managers maintain that seeking stocks with cheap prices pays off. The Legg Mason Value Trust, for example (minimum investment: $1,000. 800-822-5544), is up 40 percent this year through Tuesday, well ahead of main market indexes.

One value fund, Bridgeway Ultra Small Company, became so popular that managers recently closed it to new accounts to avoid growing too big to be easily managed.

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