Dow+30.69up+0.29%
10,464.40
Nasdaq+6.87up+0.32%
2,176.05
S&P+4.98up+0.45%
1,110.63
Tim Middleton

Mutual Funds3/4/2008 12:01 AM ET

IPOs for the rest of us

Continued from page 1

What all the funds have in common is a bias toward value investing. It was the least-damaged equity group in the bear market of 2000-02 and the best-performing through 2006. Last year, however, it fell from favor. Vanguard Growth Index (VIGRX) went up 12.6% in 2007, while Vanguard Value Index (VIVAX) eked out a gain of 0.1%.

Why value beats growth

Over long periods, the value style of investing significantly outperforms the growth style because it is riskier. Over the past 15 years, Vanguard Growth's 9.7% annualized return is 1.4 percentage points behind Vanguard Value's 11.1% advance.

Growth companies such as Coca-Cola (KO, news, msgs) and Altria (MO, news, msgs) have steady, predictable earnings. Value stocks like General Motors (GM, news, msgs) and FedEx (FDX, news, msgs) are highly cyclical, and the group tends to be top-heavy with financials, which have been poisonous of late.

But growth's stability is really cherished only when the economy shows signs of faltering, as it began to last year. Most of the time the economy is growing and so are the earnings of cyclical companies, including financial companies. What managers such as Longleaf's Mason Hawkins and Staley Cates are saying is that the bear market in value stocks has reached such extremes that they are eager to attract fresh assets to snap up bargains they are finding.

Indeed, the $13 billion Longleaf Partners Fund announced that it is reopening only temporarily. In a statement, it said Hawkins and Cates "have identified investment opportunities totaling approximately $1.5 billion between new investments and existing holdings that are significantly discounted. The Fund will re-close when cash inflows can no longer improve the Fund's opportunity set."

Novice investors flock to mutual funds that are closing and dump them when they slump, as they inevitably do. Doing the opposite, however, is a much likelier path to the creation of real wealth. I think the probability approaches 100% that three years from now, these newly reopened funds will have left last year's sexiest growth funds in the dust.

At the time of publication, Tim Middleton owned the following securities mentioned in this article: T. Rowe Price International Discovery, Dodge & Cox Stock and Tweedy, Browne Global Value.

< previous |  1 | 2 |

Rate this Article

Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowRate it 1Rate it 2Rate it 3Rate it 4Rate it 5High
Fund data provided by Morningstar, Inc. © 2009. All rights reserved.
StockScouter data provided by Gradient Analytics, Inc.
Quotes supplied by Interactive Data.
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.