Turning Investment Tide Buoys ‘Old-Economy’ Value Funds

So much for all the talk about the “new economy.”

Investors Monday poured back into “old-economy” stocks, lifting many value-oriented mutual funds that had been beaten down in the first two months of the year.

As the Nasdaq composite sank 7.6%, many value funds jumped between 2% and 3% for the day.

That’s a continuation of a rebound that began about a month ago. Many value funds, which seek beaten-down or overlooked stocks typically in such sectors as finance, heavy industry and retailing, have posted double-digit gains in the last month.

“The cool thing is just about all value funds have been so depressed recently that almost every area [within value] looks appetizing right now,” says Russel Kinnel, equity fund analyst for the Chicago-based fund tracker Morningstar Inc.

To be sure, analysts warn that just as quickly as momentum drained away from highflying tech stocks and moved into beaten-down blue chips, it can turn right back around.

Last year, for instance, value funds staged a major rally in the second quarter only to take a back seat to growth-oriented funds in the subsequent three quarters.

Still, value-minded investors can’t help but be encouraged by recent market trends.

Mutual fund investors who believe this rally has legs have no shortage of value funds from which to choose.

“The obvious ones to start looking at are the ‘deep discount’ funds,” says Bill Dougherty, a mutual fund analyst with the consulting firm Kanon Block Carre in Boston. “Those are the ones coming back the most right now.”

The term “deep discount” refers to old-school value funds that have stuck to their guns in recent years and continued to seek out only the most undervalued and beaten down stocks. As a result of this discipline, many of these funds--names such as Kemper-Dreman High Return Equity, Oakmark and Vanguard Windsor--largely or entirely avoid tech stocks.

In recent years, though, as tech stocks have come to dominate the market, many value funds have relaxed or changed their stock-picking rules. In many cases, these new rules allow them to invest in high-flying companies.

Legg Mason Value, for instance, recently held nearly 13% of its assets in Internet giant America Online.

Because these new-style value funds have moved into tech, many of them have been suffering right along with growth funds in recent weeks.

For instance, Lipper U.S. Equity, a large value fund that recently held nearly half of its assets in tech, according to Morningstar, fell 1.6% on Monday--while most value portfolios advanced. And over the past month, the fund has fallen 3.7%.

One quick way to check on a value fund’s most recent holdings is to go to Morningstar’s Web site. At https://www.morningstar.com you can type in your fund’s ticker symbol and get a snapshot of the portfolio. (For reference, the average value fund keeps less than 15% of its assets in tech, according to Morningstar.)

There is a risk, though, in focusing only on deep-discount value funds, warns Morningstar’s Kinnel. If momentum shifts back to tech, and away from banks and other depressed sectors, you could be whipsawed.

If you really think that value is on the way back, Kinnel suggests considering a “concentrated” or focused value fund--one that invests in only a handful of stocks in hopes of generating outsize returns.

This list includes names like Oakmark Select, which recently held just 17 stocks, and Acorn Twenty, which held 20.

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FINDING VALUE

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Return to Value Stocks

As the “new-economy” Nasdaq composite index has fallen more than 15% over the past six trading days, many value-oriented funds, which have severely lagged the Standard & Poor’s 500 index of blue-chip stocks in recent years, have come roaring back to life.

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1-day 1-month 1-yr. total total total Fund name return return return Ameristock +3.8% +14.2% +3.1% Kemper-Dreman High Ret. Equity +3.6 +13.7 -10.3 Putnam Fund for Growth & Income +3.0 +11.8 -1.4 Hancock Sovereign Investor +2.8 +11.1 +1.8 Vanguard Windsor II +2.5 +12.0 -6.9 Kemper Contrarian +2.5 +12.7 -13.9 Fidelity Equity-Income +2.4 +11.3 +2.8 Legg Mason Total Return +2.3 +12.1 -4.4 Babson Value +2.2 +13.9 -3.5 Stratton Growth +2.2 +13.3 -8.1 Vanguard Windsor +2.1 +12.9 +8.7 Washington Mutual Investors +2.1 +12.1 +0.3 S&P; 500 +0.5 +7.0 +15.4 Nasdaq composite -7.6 -14.1 +65.4

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Source: Bloomberg News