Value stocks perk up as dot-coms fade a bit

INVESTING

June 18, 2000|By BILL ATKINSON

For 18 agonizing months, money manager Preston G. Athey felt like he had been strapped to the rack and slowly stretched.

He and other mutual fund managers helplessly watched their funds languish - from August 1998 to last February - while many investors grew rich on soaring technology and Internet stocks.

How did he keep his sanity?

"It was with some difficulty," says Athey, who manages the T. Rowe Price Associates Small-Cap Value Fund, which has $1.2 billion in assets under management. "We had never seen a period as bad as this."

But Athey and other money managers, who embrace the "value" style of money management, are starting to smile. Their strategy of buying solid but inexpensive companies that are ignored by mainstream investors is starting to pay off.

The Russell 2000 Value Index, which tracks the performance of the smallest companies, is up 6.40 percent this year, compared with the Russell 2000 Growth Index, which has returned a negative 0.30 percent. Last year, the Russell 2000 Growth returned 43.09 percent, and the value index returned a negative 1.49 percent.

"We think we have reached bottom," says Gordon Croft, vice president of Croft-Leo- minster Inc., a Baltimore money management firm that oversees $400 million. "We are a little prejudiced, we definitely think it is over."

That's a bold statement to make, especially since markets are difficult to predict. But veterans like Croft, a money manager for about 30 years, know that markets move in cycles. One month growth stocks might be hot, and the next month value stocks could sizzle.

"If you look over the long term, value and growth do tend to take turns leading the market," says Dave Hintz, senior research analyst at Frank Russell Co., a global investment management and consulting firm in Tacoma, Wash.

That's why investors should diversify their portfolios, with money spread among investment styles, some that are aggressive, and others conservative, experts say.

"If someone were only to have growth funds and not value funds, they will have some years of severe underperformance relative to the market," he says.

Indeed, a year-and-a-half of dismal performance tested investors and money managers alike.

The Russell 2000 Growth, lifted by many technology companies, returned 138 percent from August 1998 to last February, compared with a return of 17.3 percent for the Russell 2000 Value, according to Prudential Securities and Frank Russell Co.

After returning 27.9 percent in 1997, Athey's fund ended 1998 with a negative return of 12.5 percent and returned 1.2 percent last year.

In this year's first quarter, $142 million flowed out of the T. Rowe Price Small-Cap Value Fund, he says.

"There is always the temptation when things are black ... to go chase after whatever the latest fad is," Athey says.

But he didn't budge. Instead, he looked for good companies to buy. "You just sort of hunker down and say, `I know I am buying good ... solid companies at good valuations because sophisticated, independent buyers are buying out these companies. Some day the world will understand,'" he says.

That day is here if you believe value stocks will keep rising.

Like Athey, Croft has not wavered from his strategy. He has salted millions of dollars away in an eclectic group of companies. But they are companies that he has bought cheaply and he believes they will rise.

He likes Washington Mutual Inc., a savings and loan that has been pounded by high interest rates. Its stock trades in the $27 range, down from a 52-week high of $37.6875. Smurfit-Stone Container Corp., another favorite, trades around $13, down from a high of $25.75.

Athey likes Right Management Consultants Inc., an outplacement firm, which trades at $12, down from $16.375.

He says the outflows in his fund have slowed to a trickle, especially since it has returned nearly 8 percent this year, while the major indexes are in the red.

"What does that say?" he asks. "Performance has turned around so people no longer seem so eager to get out."

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.