The scene is the boss’s office, where a faithful old toiler we’ll call SVX is having his year-end performance review.
“2000 was my comeback year,” he tells her, brandishing a sheaf of newspaper and magazine clippings. “Look at this press coverage.”
“That’s very nice,” the boss replies. “But what were your numbers?”
“They’re wonderful,” SVX replies, clearing his throat. “I beat Growth by 22 percentage points. It’s my best relative performance si ”
The boss interrupts him, pounding her hand on the desk. “Not those numbers!” she demands. “The real numbers.”
SVX hesitates, looking chastened. “Well, I’m up 4.9 percent,” he says. “I know that doesn’t even beat the money market funds. But the conditions were the toughest in a decade.”
“So that’s what you call a comeback,” the boss snorts. “If I didn’t admire your principles so much, I’d send you back to the mailroom.”
Such are the humble circumstances in which we find SVX, more formally known as the Standard & Poor’s/Barra Value Index a common standard for measuring the state of affairs among practitioners of the bargain-hunting strategy known as value investing.
Value funds can boast that they escaped most of the damage from the tech wreck of 2000. Even so, they’ve got a long way to go before they catch up with their rival growth funds.
The Vanguard Value Index Fund, which tracks the S & P;/Barra Value Index comprising the stocks with lower-than-average ratios of price to book value in the S & P; 500 Index, has returned an average of 11.8 percent a year over the past three years. Not too bad, in truth.
But the Van-guard Growth Index Fund, based on the corresponding S & P;/Barra Growth Index of the higher-valued stocks in the S & P; 500, has averaged a 14.2 percent annual gain over the same stretch.
The relative standing of the two funds in investors’ esteem is plain to see in their total assets $12 billion at Growth Index compared with $3.3 billion at Value Index.
To be fair, SVX understates the strength some managed value funds have mustered. For example, Martin Whitman’s $1.6 billion Third Avenue Value Fund has returned 18.5 percent, improving on gains of 12.8 percent in 1999 and 3.9 percent in 1998.
Whitman’s results lagged in the late ’90s during what he calls “a roaring bull market marked by more speculative excesses than I have seen in my lifetime.” Looking at the still-high prices of some computer and telecommunications stocks, he suggests that sanity and order have not yet been fully restored.
“The general public and conventional money managers seem to be infinitely more outlook conscious than they are price conscious,” he said in a recent report to shareholders.
Growth managers, conversely, tend to view their value counterparts as out-of-step curmudgeons who will buy any bit of detritus as long as it has a low price tag.
“We invest in growing businesses,” says Ron Baron, manager of the $4.9 billion Baron Asset Fund. “We won’t invest in a business that isn’t growing just because it’s cheap.”
All this makes for a lively argument, the sort of clash that cable TV talk shows love to stage. The closer you look at the situation, though, the hazier the differences become.
“Valuation is important, and it always has been,” Baron concedes in his fund’s latest annual report. In a recent Lipper Inc. panel discussion, Whitman allowed as how even his go-your-own-way philosophy ultimately comes down to a search for growth.
“Forget about this dichotomy between growth and value,” he said.
That strikes me as good advice. An investor looking for diversification might put some money in Whitman’s fund and some in Baron’s not because one is nominally value and the other growth, but rather because the two managers have demonstrated ability, and are unlikely ever to hold many of the same stocks.
Since neither one is much for “new economy” stocks, that same investor might mix in a third fund with a high-tech emphasis something along the lines of the Turner Midcap Growth Fund or the Red Oak Technology Select Fund.
Chet Currier is a columnist for Bloomberg News.
