Mid-values do well, but don't overreact

Group's recent results certainly no guarantee the trend will continue

May 12, 2002|By Christopher J. Traulsen | Christopher J. Traulsen,Morningstar.com

Don't get too carried away.

The mid-value category is off to another strong start in 2002. The average fund in the group is up 4.6 percent for the year to date through April 25. Only two other nonspecialty, domestic-stock categories have fared better for the period: small-value and small-blend. The mid-value group's fast start comes on the heels of two straight years of superior returns. The average fund in the category soared 18 percent in 2000 and 6.7 percent in 2001.

As has been the case in each of the past two years, market-cap exposure has been one of the most important performance drivers in 2002 - the smaller, the better. Mid-value offerings that dabble in large caps have fared poorly relative to their rivals. American Century Value and Strong Opportunity both fall into this camp. On the flip side, funds with smaller median market caps, such as analyst pick T. Rowe Price Mid-Cap Value and Vanguard Selected Value, have had an edge.

The other key to performance has been exposure or lack thereof to the sinking telecom and technology sectors. Funds that are light in strong areas such as industrials and overweight in technology or telecom have generally paid a steep price.

It's hard to argue with the mid-value group's performance, but we encourage investors not to overload on this group. As enticing as the category's recent results look right now, growth funds looked even better in early 2000, just before they collapsed. This group isn't nearly as risky, but if and when the growth/value dichotomy reverses, you'll want some exposure to the latter, and having too much of the former could really hurt.

Our analyst picks are:

Berger Mid-Cap Value:

Our newest mid-value pick has much to offer. It seeks out companies trading at or near their historic lows, eschews firms with high debt or low cash flows but loves fallen growth stocks. Thus, the fund has about 15 percent of its assets in the technology sector. That has held it back a bit in 2002, so its year-to-date return is merely average.

However, from its late 1998 inception through March 31, 2002, it walloped its typical peer by 13 percentage points per year on average. The fund has received massive inflows and now has about 15 percent in cash.

Longleaf Partners:

This strict-value vehicle has put up topflight results thus far in 2002. The fund's managers try to ferret out stocks trading at discounts of at least 40 percent to their intrinsic values and won't hesitate to let cash build if they can't find anything that meets their criteria.

The fund's concentrated format can hurt it on occasion, but over time the co-managers' focus on value has helped keep volatility here fairly mild. The rewards speak for themselves: The fund owns a top-decile 10-year return and a top-quartile five-year return.

T. Rowe Price Mid-Cap Value:

The fund has a conservative strategy, so it should remain a relatively steady performer.

The fund has delivered sterling results. It finished 2001 with a top-quartile return and boasts a 9.7 percent return - more than double the category average - for the year to date through April 25, 2002.

Tweedy, Browne American Value:

This fund has suffered through a couple of below-average years, but its true-blue value approach has made it a long-term winner. Despite a huge financials stake, the managers' attention to value has kept volatility here mild relative to the fund's peers.

Thus far in 2002, it's below the category norm again as top-holding Transatlantic Financial and smaller positions in Schering-Plough and Comcast have struggled. Nevertheless, the fund's since-inception return is still strong, its volatility is low relative to its peers

Weitz Value:

This fund can require patience, but we think it's well worth the wait. The fund manager is fond of loading up on sectors where he's finding values, and the cable and telecom arenas are often among the favorite hunting grounds.

That has hurt the fund in the near term, as names such as Liberty Media, Qwest Communications and AT&T are sagging in 2002. The fund will hold large cash stakes on occasion (16 percent of its assets were in cash as of Dec. 31). Although the fund can invest in companies of any size, it has heavily emphasized mid-caps and large caps in recent years.

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