Tap into value

Both growth, value funds should be part of the mix

Knight Ridder Newspapers

Never again. That's what many investors said about growth funds as their high-flying returns swirled down the drain after the technology bubble burst two years ago.

"Value funds, that's the place to be," many reasoned.

So they abandoned growth funds and shifted to funds that specialized in value stocks.


And with good historical evidence to back up their move. When growth funds stumble, value funds typically push ahead, yielding better returns. But the opposite also holds true: When value falters, growth excels.

The problem, experts say, is that many investors think of growth and value as an "either/or" proposition, investing only in mutual funds that seek to buy undervalued stocks or only in funds that specialize in the stock of fast-growing companies.

Investors tend to pick the fund style that is hot at the moment instead of thinking of the two types of funds as long-term partners.

Picking just one style when it's hot can often lead investors to put their money into funds that are about to cool off, since it's typically difficult or impossible to predict when a fund style is about to falter.

"The best advice is to always own some of each," said Paul Merriman, president of Merriman Capital Management in Seattle and publisher of But with recent years' downturn in the markets and the continuing poor overall performance of growth funds in 2001, many investors don't want to touch growth, experts say.

However, avoiding growth funds now could be a big mistake -- investors who do that will miss the gains that are likely to come when growth funds eventually swing back into a leadership position.

Growth funds hold stock of companies whose share prices are expected to grow fast -- faster than inflation, faster than other stocks in the same industry, faster than all the other stocks in the stock market. It's all about potential for future profits, which growth-fund managers forecast even if a company currently is making no profit at all.

From January 1997 through December 1999, growth funds were clearly the winners. In that last year before the tech plunge, the average growth fund returned 54 percent vs. 8 percent for the average value fund, according to data from the Lipper information service. With returns like those, it was tough for investors to resist loading up on growth funds.


During those heady years of Wall Street's longest bull run, earnings projections for growth companies grew higher, and the stocks moved up with the anticipated earnings.

But bull markets don't last forever.

From mid-2000 through the end of 2001, growth funds were down about 33 percent.

During the same period, value funds rose almost 15 percent.

Value funds hold stocks in companies that are temporarily out of favor on Wall Street.

Their stock price is relatively low in comparison to annual earnings (a low price-to-earnings ratio, or P/E) or in comparison to the assets on their books (a low price-to-book ratio). Many pay relatively high dividends, making them attractive to investors who want an income stream.

Historically, the top 10 percent of pure value funds have returned 10 percent to 12 percent for the past 10 years.

But over time, value funds often outperform growth funds in terms of total return including dividends and rising stock price. In the past decade, value funds specializing in large companies averaged an 11.5 percent annual return vs. 10.2 percent for the comparable growth fund, Lipper data show. Value funds specializing in small companies performed even better: 13.4 percent vs. 11.2 percent for comparable growth funds.

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