Value Charges Past Growth

For the first time since the summer of 1997, U.S.-based value equity funds, or those that invest in cheaper stocks that are overlooked by Wall Street, are outperforming their expensive growth stock fund counterparts, according to industry analysts.

Through May 31, the average so-called value equity fund delivered shareholders a 16.5 percent return, compared with a 14.9 percent gain for the average growth fund, according to Morningstar Inc., the Chicago-based fund tracking firm.

Those results put a definitive stamp on what many analysts have suspected since April: That the sweet spot of 1998 and the first quarter of 1999 has disappeared and investors are looking away from the “nifty 50” high-octane growth stocks and toward other sectors of the stock market.

Value funds took it on the chin in 1998. One of the industry’s largest and most well known, the Vanguard Windsor Fund, even had a portion of the fund’s assets re-allocated to a new investment adviser as a result of the market’s narrow vision. Managed by Charles Freeman of Wellington Management Co., Windsor returned 0.81 percent in 1998 and saw its assets drop to $16.5 billion from a high of $23 billion.

But before Vanguard had even had a chance to install Sanford C. Bernstein & Co. as an additional manager of Windsor, the fund rebounded as a result of the market’s broadening out. Through Thursday, Windsor was up 16.2 percent on the year, compared to an 8 percent gain in the S&P 500 Index.

The examples of a value fund comeback are abundant. At Janus Capital Corp., one of the fastest growing fund companies, its only value equity fund, the $1 billion Janus Special Situations, has gained 23 percent this year - far outdistancing the 15 percent return of the high-octane concentrated Janus Twenty.

While $7 billion poured into the $26 billion Janus Twenty during the first four months of this year, Janus Special Situations climbed past the company’s flagship fund in performance. Portfolio manager David Decker shuns the Internet-related growth stocks in favor of misunderstood companies that generate substantial free cash flow.

Among market capitalizations, small-cap value funds have been the slowest to rebound this year, up only 1.8 percent on average through May, Morningstar said. But the 3.4 percent May return of small-cap value funds outperformed every other fund category.