Currier

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Chet Currier

As growth managers and value managers slug it out for supremacy in stock mutual funds, investors don’t have to get drawn into the fight.

You can just split your money down the middle and put it into funds from both sides growth, which emphasizes high-powered earnings progress, and value, which looks for bargains among companies with less obvious attractions.

This strategy won’t take any prizes for bold decisiveness. Bet on both teams in a pick-’em football game, and you have no chance to win. But fund investing isn’t a one-shot gamble, and growth versus value isn’t the kind of competition where the winner takes all. So don’t be afraid to do it the wimpy way.

“Growth investing versus value investing is a non-issue,” said Robert Turner, chairman and chief investment officer at Turner Investment Partners, a Pennsylvania firm that manages $3.7 billion, including $600 million in mutual funds. “Both styles have proven merit, and both styles will endure because they can make money over time.”

Still, Turner believes growth, which has brought superior results in the 1990s, is going to keep winning the race for some time to come. He suggests an “overweighting” in growth, which happens to be a commercial for the style his firm employs.

Yet his enthusiasm has limits: “Nothing is certain in investing you only have probabilities,” he said. “The risk-reducing benefits of diversification work best when stock investments are spread across both styles.”

Mixed together, growth and value funds make good diversifiers because they rarely buy the same stocks. Growth stocks, such as some of today’s technology giants, almost always look too expensive for a value manager to buy. Value stocks almost always lack the record of steady earnings gains that growth managers insist upon.

Dan Wiener, editor of the newsletter Independent Adviser for Vanguard Investors, said the idea of diversifying in “non-correlated” investments is analogous to dividing your capital between a bathing-suit manufacturer and an overcoat company.

Put all your money in either venture and you have a boom-bust cycle every year. “However, if we invest only half our money in the bathing suit company and the other half in the overcoat company, we get an entirely different (and improved) portfolio,” he said.

Stability replaces volatility, without necessarily requiring any sacrifice of return.

As a generalization, value managers fare best when the economy is looking strongest, since value stocks tend to be highly sensitive to the business cycle. Growth stocks, not so dependent on cyclical forces, shine when growth is slower or slowing.

As the business cycle has all but vanished in the 1990s, allowing a U.S. economic expansion lasting more than eight years, growth has been the clear standout. Growth-stock indexes have outperformed value indexes for the decade, the past five years, and even this year, although value held the lead for a few months there.

The Standard & Poor’s Barra Growth Index, comprising the stocks in the S & P; 500 with higher price-to-book-value ratios, has climbed at a 17.1 percent annual rate since Dec. 31, 1989. Over the same stretch, the S & P; Barra Value Index, made up of S & P; 500 stocks with lower price-to-book ratios, gained 11.8 percent a year.

Over the past five years, the growth index racked up a 28.6 percent return compared to 18.7 percent for the value index. So far this year, even with a surge in value stocks from April into early summer, the growth index leads with an 11.7 percent gain against 9.3 percent for the value index.

Remarkable as growth’s dominance has been, value partisans say it only strengthens the case for their side from here on. At last tally, the S & P; Barra Growth Index had a sky-high aggregate price-earnings multiple of 40, meaning that investors were paying $40 for each $1 of earnings. The S & P; Barra Value Index P-E looks cheap by comparison at 26.

What next? Who knows? The good news is, if you put some of your money into each type of fund, you don’t have to know.

Said Turner, “For sophisticated investors, the issue is not one of growth or value, but rather growth and value.”

Money market value

Whatever attracts people to money market mutual funds, it’s not just the money.

In the 1990s, money funds have returned about 5 percent a year, on average, while big-company stocks comprising the Standard & Poor’s 500 Index returned 17 percent and long-term government bonds returned 8 percent. That’s a lot to give up for day-to-day stability.

Money funds’ yields, which provide all of their total return, dropped sharply during the long, erratic descent of interest rates. One of the biggest funds of the breed, the $36 billion Fidelity Cash Reserves, returned 7.8 percent in 1990, and now yields about 4.9 percent.

But never mind all that. Money funds keep growing fast anyway. Last year they pulled in $235 billion, more than twice as much as in any previous year, according to the Investment Company Institute trade association.

At nearly $1.5 trillion, money funds hold almost one-fourth of all the assets in mutual funds, even though they haven’t gained anything from market appreciation the way stock and bond funds have done in their mighty bull markets. When advisers nag people to put their savings someplace with a better long-term return, fans of money funds pay no attention.

“Many investors think that cash isn’t really an investment,” said Jim Lowell, editor of Fidelity Investor, an independent newsletter that tracks the Fidelity fund group in Boston. “Not me. I view cash as equivalent in stature to equities and bonds.”

ICI researchers have found that flows into money funds go up when the spread increases between money fund yields and the deposit account rates at banks. Since 1995, money funds have enjoyed a wide edge averaging more than 2 percentage points.

Money funds benefit from several enticements, including ready access to your money. Though they are not, repeat not, covered by federal deposit insurance, and their net asset values are not, repeat not, guaranteed to be stable at $1 a share, they are perceived as safe a new-age savings account.

Because their per-share net asset values don’t change from day to day, money funds are the only sensible type of fund to own when you want to write checks on your mutual fund account.

If a fund’s asset value varies at all, you could tie yourself in knots making capital gains tax calculations for every check.

Money funds provide a haven from the threat of rising interest rates, a force that bond fund (and stock fund) investors have learned from experience to fear.

Chet Currier is a columnist for Bloomberg News.

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