MARKET BEAT / TOM PETRUNO : Fund Buyers Lead Return to ‘Value’

Stock mutual fund buyers continue to take the high road in their investment strategy: Most want conservative, even stodgy stock funds that will make them rich slowly.

Happily for those buyers, the strategy is working well in the short term as well. In the first quarter of this year and for the last 12 months, conservative stock funds are outpacing their more aggressive peers.

Indeed, the enduring theme on Wall Street for the last 15 months has been the return of “value” investing.

While high-flying “growth” stocks in such fields as health care and consumer products ruled the market for most of the 1980s, many of those stocks have crashed and burned since the start of 1992.

Meanwhile, the downtrodden stock groups of the last decade, such as energy, heavy industry and banking, have sparked to life. These stocks, which typically carry low price-to-earnings multiples and above-average dividend yields, are classic choices of value-oriented money managers who shun high risk.

The shift from growth to value has been powerfully illustrated by two stock indexes developed by BARRA, a Berkeley-based investment firm. The firm split the Standard & Poor’s index of 500 blue chip stocks into two groups--one value stocks, the other growth.

Backtracking to pick up historical performance, the indexes show how dominant the growth theme has been in recent years--until 1992:

* From 1985 through 1991, growth stocks outperformed value stocks in five of those seven years. In 1991 alone the growth index soared 38.4% (measuring price change plus dividends), versus a 22.6% rise for the value index.

* Last year, growth stocks stalled badly, rising just 5.1% as a group. Meanwhile, the value stocks’ return was double the growth stocks, at 10.6%.

* In the first quarter of this year, value stocks reigned supreme: The group soared 2.7% in January, 3.5% in February and 3.3% in March. In contrast, the growth stocks declined 1.2% in January and fell another 0.8% in February, before rebounding 1.7% in March.

Buoyed by their favorite stocks’ return to glory, the two main conservative stock-fund categories--”growth-and-income” and “equity-income”--are posting much better returns than funds that chase more speculative stocks:

* The average growth-and-income stock fund rose 4.39% in the first quarter, while the average equity-income fund jumped 6.08%, says fund tracker Lipper Analytical Services. Over the last 12 months, the groups’ returns are 13.87% and 16.41%, respectively.

* The typical growth fund added just 2.41% in the first quarter and is up 11.86% for the 12 months. Another category of aggressive funds, “capital appreciation,” was up 3.29% for the quarter and 11.33% for the 12 months.

Coincidentally, the more conservative stock funds have been small investors’ hands-down favorites over the last year--a trend that has accelerated in recent months as stock fund inflows have soared.

Gross purchases of aggressive-growth-style mutual funds totaled $2.83 billion in February, the latest month available, according to the Investment Company Institute. That was up 14% from February, 1992, purchases.

In contrast, gross purchases of growth-and-income funds zoomed to $4.88 billion in February, up 39% from a year earlier. And the even more conservative equity-income funds saw $1.46 billion in gross purchases in February, a stunning 95% rise from a year ago.

The overwhelming popularity of the value-oriented funds is significant for two reasons: First, it suggests that the value stocks have much more life in them, because the tidal wave of mutual fund dollars is flowing their way.

And second, investors’ conservatism shows that while “fad” funds often get the headlines each quarter, most people would rather invest in slow, steady, dividend-paying stock funds that are the antithesis of flashy.

While Wall Street’s bears have argued that the torrent of money flowing into stock funds is cash from ignorant, longtime bank customers who know nothing about stocks’ risk, many fund experts argue otherwise. “These are people who pay much more attention to their money” than Wall Street may believe, says Michael Hines, a Fidelity Investments executive who tracks fund trends.

The average stock fund investor, Hines believes, is “someone who is saving for the long term and is conservative. . . . They aren’t trying to play with their money.” Rather, he says, they understand that the only proven way to grow a nest egg over time--and to beat inflation--is with stocks.

But that raises a key question about the conservative stock funds: Are they in fact the best route to long-term wealth?

Over the last 30 years (measured through Dec. 31), the average growth-and-income fund is up 2,133%--slightly lagging the 2,147% average rise of the more aggressive-growth category.

Over the last 20 years, the growth funds have a similar small edge: 806% to 796%.

But Lipper Analytical President Michael Lipper says those numbers don’t show the No. 1 advantage of conservative funds, from the average investor’s point of view: When a bear market comes, the value-oriented funds will suffer much less than their aggressive peers.

Conservative funds “lose less for you in troubled periods and make good money for you in good periods,” Lipper says.

Particularly for new investors entering the stock market today, the greater peace of mind that value funds offer is much more important than the sliver of performance they may sacrifice over the long haul to get it.

Conservative Stock Fund Stars These conservative stock funds get the highest rating--five stars--from mutual fund rating service Morningstar Inc. in Chicago. The ratings are based not only on the funds’ investment performance, but on other key factors, including reasonableness of fees and the level of risk incurred to achieve returns.

Fund Total investment return: (phone number) Fund type 5 years 1st Qtr. AIM Value (800-347-1919) Growth & inc. +164% +5.6% Copley Fund* (800-424-8570) Growth & inc. +101% +8.8% Fidelity Growth & Income (800-544-8888) Growth & inc. +131% +7.8% Financial Industrial Income* (800-525-8085) Equity income +131% +9.0% Gateway Index Plus* (800-354-6339) Growth & inc. +87% +1.6% Main Street Income & Growth (800-548-1225) Growth & inc. +190% +8.2% MainStay Value Fund* (800-522-4202) Growth & inc. +121% +6.0% Shearson Prem. Total Ret. B* (800-451-2010) Equity income +101% +3.3% Vista Growth & Income (800-348-4782) Growth & inc. +297% +5.7% Average growth & inc. fund +89% +4.4% Average general fund +93% +3.3% S&P; 500 index +106% +4.4%

* indicates fund does not charge load (sales commission) Source: Morningstar Inc.; Lipper Analytical Services