The year 2000 was supposed to be the year when "value" funds beat "growth" funds.
Someone obviously forgot to tell those frisky growth stocks.
With a little under four months left in 2000, value funds still have time to make a comeback. Many value stocks, in fact, have done just that in recent weeks.
But barring a substantial turnaround, growth is not only looking very good, but has beaten value by about 2 to 1 this year, according to an analysis of more than 2,000 equity funds by Morningstar Inc., a Chicago-based financial information firm.
Through Aug. 31, growth-fund returns have averaged about 14 percent, well ahead of value's average gain of about 7 percent. As the chart to the right shows, growth funds have beaten value in the late 1990s, and held their own with value through much of the past decade.
"It is truly remarkable to see how long a successful run growth has had now," says Russel Kinnel, director of fund analysis for Morningstar.
Growth funds invest in stocks with rapidly rising earnings. They tend to be eagerly sought out by investors and thus have built-in momentum. Examples of growth stocks include Intel, Oracle, and America Online. Many growth stocks tend to be technology-linked.
Value funds, in contrast, invest in stocks that are beaten down, or not fulfilling expectations. They tend to be the wallflowers of Wall Street, unloved by the market. At the same time, value companies often have hidden or overlooked assets that could carry the stocks to new highs. Examples include tobacco stocks (unpopular, beaten down, but carrying hidden assets, such as the Kraft food holdings of Philip Morris) and retailers such as Sears and Kmart.
The competition between growth and value has been one of the great battlegrounds for mutual-fund investors throughout the 1990s, a period largely dominated by growth, but in which value aficionados kept insisting that their products were making a comeback.
Yet, only a few decades ago, most major mutual-fund companies tended to largely ignore the distinction between growth and value and instead created large hybrid or blended mutual funds that bought both types of stocks.
Today, ironically, the name of a fund is not necessarily a guide to the nature of the stocks in that fund. A number of value funds in recent years have added some growth stocks to their portfolios to spice up returns, while some growth funds have added more conservative value companies as insurance against a market downturn - a period when growth stocks tend to falter.
One of the best-known value funds, the Legg Mason Value Trust, has not been above adding a solid growth stock to its portfolio - such as America Online or Dell Computer - to spark up returns.
Although growth has overshadowed value for the year, value funds have done very well in recent months, says Sheldon Jacobs, editor the No-Load Fund Investor, a newsletter published in Irvington-on-Hudson, N.Y.
According to his own head count of equity funds, value has beaten growth during the past five months. Moreover, in some categories - the small-cap (small company) arena, for example - the two types of funds are virtually balanced off.
Consider the two Vanguard Small Cap funds, says Mr. Jacobs: The Vanguard Small Cap Growth Fund and Vanguard Small Cap Value Fund were both up exactly 13.4 percent for the period ending Sept. 5.
"Growth goes with technology," says Jacobs. But that alone should give investors pause, he says, since the momentum behind highly valued tech stocks will come to an end at some point.
If an investor is only in growth funds at this time, the ride downward could be rather unhappy, he suggests.
"The long run of growth stocks is a reminder that while a type of investment may do well for a five- or 10-year period, it will ultimately end," says Mr. Kinnel, of Morningstar. "The only way to ensure that you stay abreast of the market is to be fully diversified, which means owning both types of funds, or funds [such as blend funds] that carry both value and growth companies."
Blend funds tend to "be less volatile and provide a smoother ride" over time, Kinnel says.
The best-known blend funds are surely the Vanguard Index 500 fund and the Fidelity Magellan Fund. Magellan is a perfect example, since at times it is growth-oriented, at times value-oriented.
"Focus on your own particular investment objectives," says Kinnel. "That way you will be buying funds that meet your own needs," not just reflect the style of investing that is most popular for the moment.
"It seems deceptively easy to time the market" - that is, buying value one year, growth another year, Kinnel says. "But studies show that market timing is extremely difficult."
Moreover, in buying funds, see the funds as part of your larger "financial plan," Kinnel says, including individual stocks you own, your bank accounts, your home, and other assets. Doing that, he says, will keep you from pursuing fashionable trends that may be about to go bust in the market.
(c) Copyright 2000. The Christian Science Publishing Society