THEY HAVEN’T NOTICED SURGE YET: VALUE FUNDS UP, BUT NOT WITH INVESTORS

Value may be back, but its investors aren’t. At least not yet.

Though value mutual funds have consistently outperformed their growth brethren for the past few months, they haven’t been much of a money magnet so far. That might change, however, as more investors hear of value’s lofty recent returns.

Through May 28, the S&P Barra 500 Value index had gained 9.74% in 1999, while the S&P 500 Barra Growth index had lagged with a 3.57% return. For now, investors seem reluctant to give up on growth, which, at least among large-company portfolios, has outperformed value for six years.

“It would be uncharacteristic of clients to run away from something that has done so well by them until recently,” says Rick G. Mahlum, a certified financial planner with Lighthouse Investor Services in Minneapolis.

But the tide may shift as value’s performance gets more play.

In May, the assets of value stock funds grew by $410.3 million, according to Financial Research Corp. in Boston, tracking a stellar performance month as the market broadened and started favoring a larger range of stocks. A shift into cyclical companies also helped.

While not exactly a turnaround, the May performance ended a nine-month streak of redemptions for value funds. In April alone they had lost $4.9 billion.

Meantime, growth funds gained about $6 billion in May — only half of the gains reaped in April, FRC reports.

the great chase

“Investors chase performance,” says Mr. Mahlum. “They are not likely to change cash flows meaningfully until that happens.”

There are some impressive returns to chase. At Vanguard Group, for example, the value index fund had leaped 11.6% for the year as of last Wednesday, while the Malvern, Pa., company’s growth index fund was returning 6.7%.

Aim Management of Houston showed similar results. Its Large Cap Growth Fund’s 5.64% return was surpassed by its value offering’s 11.5% year-to-date gain.

Flows into Fidelity’s growth-oriented Contrafund have almost dried up, with only $48 million going in during May, compared with $91 million in April, says FRC. Returns were up 8.1%.

Vanguard’s $12.83 billion PrimeCap, up 13.8%, suffered similar investor disinterest, with only $64 million coming in. The month before, the fund saw an influx of $140 million. Like Contrafund, it closed to new investors last year.

One of the biggest losers was the Janus Twenty fund. It gained $338 million in May, compared to $2.1 billion the previous month, during which it closed to new investors. It’s up 13.5% for the year after a 73.4% gain in1998 and has dropped from eighth among capital appreciation funds at yearend to 80th, according to New York fund tracker Lipper Inc.

Other Janus funds with similar, though less concentrated, growth styles also have been punished by investors. Flows into Janus Fund fell $144 million in May. Its Mercury fund added $166 million less than it had in April.

They may not be licking their wounds, but some growth managers have been humbled.

“You can’t outperform every quarter,” says Ken Corba, who runs the $2.4 billion growth fund for Pimco Equity Advisors in New York. It is up just 2% for the year as of June 24; through March, it was up 8.23%

For three months, Mr. Corba saw a healthy flow of money into Pimco’s three growth funds. But gains have slowed to a trickle since then.

“Investors probably lost interest in large-cap growth stocks,” he says, adding: “Value funds had a lot of catching up to do.”

Mr. Corba still staunchly defends growth investing. Rising interest rates hurt growth companies, particularly large-cap ones, more than they do value firms. Investors’ fear of an interest rate spike has overshadowed reports of positive second-quarter earnings, he notes. When interest rates start falling again, which he predicts will happen by the end of the year, growth may triumph over value again.

Meanwhile, however, other fund complexes are seeing similar retreats from growth funds and gains for value offerings. American Century Investments of Kansas City, Kan., for example, reports unspecified outflows from American Century Growth (up 6.9 % year to date ) in June while its Value fund (up 11.9%) has taken in about $13 million.

Amex growth assets slip

The story was repeated at American Express Financial Advisors in Minneapolis, whose growth fund has seen a 2% drop in net assets since the beginning of the year, according to a spokesman.

Hardly surprising, considering the returns of value stocks since April 8, when the market took a sharp turn toward cyclical stocks.

“Value is having its day for a while,” says Louis Giglio, who runs the growth entry, American Express Strategy Aggressive fund, which has gained 6.9%.

He and others expect value investing to disappoint once again, saying first half earnings reports for many of the companies that value buyers favor may not be as strong as expected. Other economic indicators with the potential to soothe interest rates, like a tame consumer price index report on June 17, hammered value stocks and pushed growth higher.

“The hard market rotation into cyclicals is going to have some give-back,” says C. Kim Goodwin, senior portfolio manager with the American Century Growth Fund. “We’re already seeing it.”

She may be onto something: Through last Wednesday, S&P’s value index gained only 1.8% in June, tipping the scales in favor of growth funds, which returned 3.1%.

Ms. Goodwin says asset flows to her $7.7 billion fund turned negative in early June, as more shareholders got word of value stocks’ May performance. But since then, the flows have stabilized.

American Century’s $2.2 billion Value Fund by comparison, saw cash flows turn positive in May. Two other value funds have also been money gainers because they are relatively new, a company spokesman says.

Redemptions might have been worse for American Express’ Mr. Giglio if a big portion of his portfolio did not belong to 401(k) retirement participants, a group not likely to be market timers.

“Styles come in and out of favor,” he says. “But you can’t invest on it, you may be able to trade on it, but you can’t invest on it.”