Still-rattled investors crowd onto the value bandwagon.

They were treated like rock stars in the late 1990s, but growth fund managers these days are singing the blues-and starving for fans. Value funds have just been that good.

In the overall scheme of things, five years may not be a long time. But for growth managers, and the investors who have relied upon them, it's a block of time that's probably seems to have taken on epic proportions.
    Since 2000, when the high-tech bubble exploded, growth funds have yet to overcome the returns and, perhaps more important, the perceived safety of their value investing counterparts. According to some measures, value has outperformed growth by an average of 15% a year.
    As value has chugged along-helped in the last 18 months by a surge in oil prices-growth has been struggling to redefine itself. Indeed, solid performers can be found within growth. Yet, taken as a whole, it certainly lacks the sizzle that defined it in the late 1990s.
    Investors' memory of the recent past, in fact, may be growth investing's most vexing problem. Growth managers, observers say, are to a large extent still feeling an Internet bubble backlash. Speculation and the quest for high returns have since taken a back seat to safety and capital preservation. It's an attitude that fits value investing like a glove, they note.
    "From the fund side there appears to be a fair amount of wound licking going around," says Andrew Clark, senior research analyst at Lipper. "People are still wary of the stock market. When people have gotten that badly burned, they are going to go with safety."
    The gap between value and growth has grown so wide that it has reached unprecedented proportions, even more than when the roles of growth and value were reversed in the 1990s, notes Ernie Ankrim, chief investment strategist for the Russell Investment Group.
    Through the 60-month period comprising February 2000 to February 2005, the Russell 1000 Growth Index had an annualized loss of 10.5%, he says. By comparison, the Russell 1000 Value Index had an annualized return of 5.5%.
    That gap of 16% per year for 60 months is the largest differential, covering the longest period, since at least 1979, which is as far back as the index data goes, Ankrim says. "On a longer-term perspective, this is really an astonishing period of outperformance," he argues.
    Yet what that means for the future is a matter of guesswork. It seems that for everyone on Wall Street who says value has reached its peak, you can find a value proponent who feels there are no indicators that point to a slowdown in value.
    The returns in 2005 so far support the value proponent's view.
    Through the period ending February 28, value has beaten out growth in every capitalization tier. The largest gap was in the large-cap sector, where the Russell 1000 Value Index had a year-to-date return of 3.31%, compared with 1.06% for growth. The tier that was closest to parity was in small caps, where the Russell 2000 Growth Index had a return of 1.37%, slightly trailing value's 1.99%.

Also noteworthy is the fact that large-cap stocks outperformed small caps for the third consecutive month in February, after six consecutive years of small-cap outperformance, largely through the performance of value stocks in the oil and energy-related sectors.

There also hasn't been any indication that investors are diverting money to growth in expectation of a reversion to the mean, says Clark of Lipper.

"From a flow standpoint, we're definitely not seeing that," he says. "We are still seeing safety and soundness. Since January, it's basically a repeat of 2004, which is that people don't want to take capitalization risk."

Although investors can find growth stocks that are performing well, the sector as a whole is still muted due to a lack of any hot sectors and a general perception that growth is riskier than value, he says. Clark notes that large-cap growth funds still have 25% of their holdings devoted to information technology, at a time when many investors are still wary of anything related to technology.

Large-cap value funds, by comparison, have about a 10% exposure to information technology, he says. "There's nothing in the technical indicators that I see that says the reversion is coming," Clark says.

From a strictly historical perspective, however, some observers see the market in a teetering position when it comes to the balance between growth and value. One comparative measure, says Ankrim, is the price-to-sales ratio of the Russell 1000 growth and value indexes. Over the long term, the price-to-sales of the value index is about half that of the growth index. During the height of the dot.com market, in January 2000, value price-to-sales was about one quarter of growth's.

During this five-year run, however, value's price-to-sales has closed to two-thirds of that of growth, Ankrim says. That's an unprecedented level, he says. It's the type of disparity, he says, that can cause dangerous overreactions among investors-just as the run-up in growth's value did in the 1990s.

"The degree in disparity matches and even exceeds the disparity of the previous five years (before 2000)," he says. "Both experiences entice people into behavior that will cost them money in the long term."

Has growth slumped to the point where there's too much of a bargain in the sector for the market to resist? Growth fund managers, particularly those who have weathered the past five years with respectable performance, argue that that point has either been reached or is on the horizon.

Others say it would at least be prudent to be prepared for such a turnaround. Lincoln Anderson, chief investment officer and chief economist at LPL Financial Services, recently recommended its advisors overweight on growth relative to value.

"It's more from a risk perspective than a return perspective," Anderson says. "We're just concerned that if there is some sort of a breakdown or a problem that arises, the potential for it to hit value greater than growth is certainly there."

Anderson sees a reason to believe a recovery for growth investing is near: a promising outlook on the economy. Capital spending in the technology sector is among the trends supporting a rebound by growth. Anderson notes that capital expenditures on information processing-computer equipment and software-is up 16% from a year ago. Broad-based equipment investment was up 18% in the fourth quarter, he adds.

Added to that is what he considers a fairly low industrial capacity utilization rate and a healthy balance between prices and labor costs.

"It's telling me that we are still embarked on an increasingly broad-based expansion and I don't see anything to slow it down," he says.   

Sophisticated investors are positioning themselves for a reversal of fortune. Bob Turner, chief investment officer of Turner Funds, reports that his firm's assets rose about 50% from $10 billion to $15 billion in 2004, with most of it coming from advisors and institutional investors.

Turner has maintained his style discipline, resisting the temptation to dip into value stocks to juice their performance, unlike some of his peers.  "The move back to growth will be gradual. Three-year cycles have become five-year cycles," he says.

When growth stocks do start to move again, Turner expects the gains to be far more modest than those in the 1990s. "There's no reason why Oracle can't go from $13 a share to $18 or why Microsoft can't go from $26 a share to $33 or $34," he says.
Other growth fund managers are also confident that better days lie ahead. Alex Motola, portfolio manager of the Thornburg Core Growth Fund, says fundamentals point to a healthy run for growth-all that's missing, he says, is investor enthusiasm.

"Partly as a hangover from what happened in 1995 to 1999, value stocks are the ones that tend to be held," he says. "It was a very good category to be in the last five years."

Motola, however, feels growth is undervalued based on historical benchmarks, and robust earnings growth among the S&P 500 companies point to a sector headed for a rebound. Motola's fund brought a return of 14.50% in 2004, and has an annualized rate of return of 11.03% over the past three years.

As a multicap fund that focuses on company fundamentals, the Thornburg Core Growth Fund has the ability to bring a broad diversity of holdings into the fold, Motola says. The fund's current holdings range from large caps such as Microsoft and Comcast, to small caps such as Gamestop and Imax Corp.
The fund looks for growing companies in growing industries, usually those with a dominant position in the marketplace, he says. That accounts for the fund's purchase of Microsoft and Comcast, the latter of which Motola saw as an industry leader because it led competitors in capital improvements of its network.

"They got the vast majority of spending behind them," he says.
Part of a cable television industry that has been largely shunned by investors in recent years, Comcast was trading at around $33 in mid-March, up from $26 per share last fall.

The fund bought Imax in September, after the company had lowered the cost of the technology and dramatically lowered the cost of formatting movies for showings in Imax theaters. The company was at about $10 in mid-March, up from a low of $4 per share a year earlier.
Motola feels his fund uses the type of fundamental analysis that was hard to find among growth managers in the late 1990s. "I think the industry has changed for the better," he says. "Now they are doing the things they should have done all along," he says-more in-depth analysis, field checks and less reliance on Wall Street research."

Bernard Myszkowski, co-portfolio manager of the ABN Amro Growth Fund, has been able to attain a 12.68% annual rate of return over the past ten years. The fund, whose holdings include Cardinal Health, Starbucks, Dell and Oracle, tries to invest for the long term and avoids "trying to catch a quick move that will pump it up in three weeks."
    "Our definition of growth," he says, "is we're looking for careful stock selection of high quality companies with strong fundamentals that can grow faster than the S&P," he says.