‘Value’-Oriented Funds Shine Amid Toppling Indexes

Investors who aren’t feeling panicked about the stock market may indeed have no reason to be: Many of the funds that hold the biggest chunk of investors’ dollars aren’t doing all that bad--so far.

Thanks to the “value” bent of many fund giants, such as the Vanguard Windsor series and Fidelity Equity-Income, some of the most popular 401(k) retirement-plan funds still are up this year, or off modestly.

Three huge funds from the relatively staid American Funds group--Investment Company of America, Washington Mutual and Growth Fund of America--were all in the black or down just slightly through Thursday.

Unlike in recent years, active portfolio management is proving its mettle across funds of all sizes in 2000: While the Dow Jones industrial average, the Standard & Poor’s 500 and the Nasdaq composite indexes are down between 9% and 36% year-to-date, the average U.S. stock fund has lost about 5%, industry data show.

Of course, the pain is worse in many funds, including some of the largest. Performance-chasers who jumped into funds in the then-sizzling Janus family in the first quarter may be feeling burned--which could be one reason why Janus has seen net cash outflows in recent months. The Janus Twenty fund has plunged 27.9% so far this year.

Still, the estimated outflow from Janus funds in October represented a small 0.3% of the firm’s fund assets, noted Avi Nachmany, analyst at Strategic Insight, a fund-industry research firm.

Overall, stock funds have continued to see net cash inflows in recent weeks, though the pace has moderated. A key reason for those inflows: Despite the market’s tumble, most investors haven’t changed their regular investing programs via retirement accounts such as 401(k)s and IRAs.

Mutual fund investors, who now have $4.2 trillion in stock funds, tend to trade less than individual-stock owners, analysts note, and they say that any changes fund owners make in their habits in coming months are likely to be subtle.

“The creeping out-performance of value stocks evidenced this year should filter into investor choices in the coming months and into 2001,” Nachmany wrote in a recent report. “But we believe that the transition from growth to value bias will be slow.”

Though many of the largest funds follow a value-oriented style, growth-stock funds have become increasingly popular over the last two years, boosted by tech stocks’ rally in 1999 and through March.

Jonas Max Ferris, chief of the Maxfunds.com Web site, sees signs of renewed interest in value even though fund cash flows have remained tilted toward growth.

“A guy in a chat room just asked me if I knew any good value families,” he said. “That’s a question you would not have heard six months ago.”

Value-oriented funds such as Vanguard Windsor II, Washington Mutual and Fidelity Growth & Income tend to focus on stocks selling for lower price-to-earnings ratios, such as financial, utility, tobacco and energy issues. Those shares have performed far better this year than once-high-flying tech issues.

Ferris said there could be a sharper change in fund investor preferences if performance trends persist. “Small-cap and value funds could attract a ton of cash if they keep outperforming large-cap and technology funds in the next three to six months,” he said.

“There is a lot of money on deck, waiting to fund the next hot area to be in,” he said, noting that money market fund assets are at a record high. “Once the [market] trend has gone on long enough for people to see it in the one-year returns, they start saying, ‘Hey, wait a minute.’ ”

One big looming question: With the S&P; 500 on pace for its worst calendar year performance since 1977, will investors in S&P; index funds begin to question that strategy? The Vanguard 500 Index fund, the largest stock fund of all, is down 9.5% this year, including dividends.

Another question centers on bonds. When 401(k) investors get their annual statements in January, they will see that many bond funds posted positive returns this year while stocks slumped. The Pimco Total Return fund, for example--the biggest bond fund--was up 9.4% through Thursday.

That could force many investors to reconsider their asset mix.

In October, 71% of 401(k) contributions went into company stock and other pure equity choices, according to consultant Hewitt Associates. That compared with 68% a year earlier and 66% in October 1998.

If most stock fund investors aren’t panicking so far, many are anxious. A recent posting titled “Ugggg” on Morningstar Inc.’s Janus message board summarized the mix of frustration and nervous optimism that some aggressive investors are expressing:

“Not a single bright spot in my portfolio. Everything is down between 25%-50%. Yep, I should have been more diversified. . . . Hindsight is everything. I’m holding on to what I have, though.”