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Mutual Funds
Value funds show signs of life
April 29, 1999: 12:44 p.m. ET

After stumbling in 1998 and early 1999, April is a turning point for bargain stocks
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NEW YORK (CNNfn) - For months, Charles Freeman at Vanguard Windsor Fund faced plenty of skeptics who questioned his choices in beaten-down commodities and other cheap 'value' stocks.
     Investors dumped their shares at the onetime flagship fund as Freeman watched growth stocks soar at a breakneck pace.
     But Freeman and other value managers are getting some relief -- and perhaps some absolution -- as value stocks are making a comeback this month.
     "We knew we had a good portfolio, a sound portfolio with a lot of unappreciated value," Freeman said this week. "We feel our portfolio has been validated."
     The fund, with $18.5 billion in assets, is up 14.39 percent year-to-date as of Thursday and is ranked in the 7th percentile in its category, according to fund researcher Morningstar. It is beating the S&P 500 by 3.38 percent.
    
Value comes up for air

     What has jolted value to life?
     Value stocks, which trade at much cheaper prices than they're worth, were all but forgotten in 1998 and early 1999 as investors focused on a handful of hot growth names like America Online (AOL) and Microsoft (MSFT).
     "Last year, growth was so ahead of value that people were wondering why they even had value (holdings)," said Bill Dougherty, an analyst at Cannon Bloch Carre, a Boston fund researcher. Growth funds earned an average of 44 percent, compared with 14 percent for value funds.
     Freeman compared growth funds to a basketball team that is ahead by 20 points and still keeps its first string in the game in the third quarter.
     "Growth stocks dominated the market," Freeman said.
     Things got so bad that famed value investor Michael Price of Franklin Mutual Series Fund Inc. wrote to shareholders April 2 asking them to be patient.
     "We know it's easy to get swept away in a growth market," Price wrote. "But I've been in this business more than 25 years and I've watched investors figure out a way to justify incredible multiples, only to see valuations collapse back to the underlying worth of the company. We are value investors, and at these prices, we aren't going to buy names like Microsoft."
     Price could not have timed the letter better. Around the same time, investors started to nose around beaten-down value and cyclical stocks.
     Between April 1 and April 23, the average returns for value funds edged ahead of growth funds in the first sign of a real turnaround since 1993, said Chris Traulsen, equity fund analyst at Morningstar.
     Value funds earned roughly 3 percent more than growth funds in that time, Traulsen said. (Click here to see comparisons between different categories of value and growth funds).
     "It's been encouraging, because these (value) stocks have been heavily discounted," Traulsen said. "This is the first time we've seen some of these deep value plays push to the head of the group."
    
The underdogs rebound?

     Freeman said a lot of the stocks that the Windsor portfolio has owned for a long time started turning around -- especially commodities-related issues like energy, aluminum, paper and chemical companies. Financial companies, real estate investment trusts (REITs) and health care stocks also came to life.
     The fund's top holding, Citigroup (C), represents 8.3 percent of the portfolio; followed by a 5.5 percent stake in AT&T (T); and a 5.4 percent investment in the Dow component Alcoa Inc. (AA).
     "The market is less narrowly focused on a small group of stocks," Freeman said. "We're getting the benefit from the broadening of the market."
     About 32 percent of the portfolio is in commodities, including a big presence in energy stocks like Burlington Resources (BR) and Union Pacific Resources, Freeman said.
     "When the market broadens, our fund typically does well," Freeman said. "At the very least, this is a level playing field."
     The fund's net asset value rose 8.3 percent in seven trading sessions, putting Vanguard Windsor number one on April 19 among the 25 largest funds. While the fund has since lost some of those gains, Freeman is optimistic.
     "I don't expect it to be linear," he said about the increases. "(But) we're seeing a lot of good things happening fundamentally in our portfolio."
    
Winning with IBM

     David Basten, manager of Yorktown Classic Value Fund, also feels some vindication. The fund, with $17.7 million in assets, is up 23.32 percent year to date at Morningstar, making it number 1 in its category.
     "It's a wonderful thing to be in stocks that are moving and have a long way to go," Basten said. IBM (IBM), a popular choice among value investors, recently reported first-quarter earnings that were way ahead of expectations.
     He said IBM and related companies represent 20 percent of the portfolio.
     "You have to look at where the stock will be in five years," Basten said. "We think IBM has a bright future."
    
Will the trend continue?

     David Dreman, chief executive of Dreman Value Advisors in Jersey City, NJ, said he thinks the trend into oil and financial stocks will continue. (124K WAV) or (124K AIFF).
     "What we're seeing is a broadening of the market," he said.
     But it's too soon to say whether value will remain on top, Freeman and Traulsen said.
     The year-to-date figures as of April 23 show growth funds still far ahead of value, Traulsen said. Growth is about 3 to 5 percent of value in different categories, he said.
     "After last year, it's anybody's call," he said.
     Freeman said a lot will depend on the condition of the world economy. While Asia is improving and the situation in Latin America isn't as bad as people thought, Europe is a "wild card." But the U.S. economy is strong.
     Meanwhile, redemptions have dried up in April, Freeman said.
     "Clearly it's a different era we're operating in," he said. Back to top
     -- by staff writer Martine Costello

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.