Don't Get Swept Up in the Wave of Rookie Value Funds

Value investing has gone from the doghouse to the penthouse, so brace yourself for a geyser of value fare, even though plenty of solid offerings already exist.

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Over the past few years, value funds, whose price-conscious strategies typically lead to tech-light portfolios, lagged behind tech and more aggressive growth funds that tend to make big bets on that mercurial sector. In a familiar pattern, investor dollars flocked to tech and tech-stuffed growth funds and fund companies slapped growth funds together as fast as they could -- less than a third of the tech funds out there have a three-year record.

But in the wake of the tech sector's collapse, the average small-, mid- and large-cap value funds are up 25.5%, 18.5% and 6.9%, respectively, over the past 12 months, according to Chicago fund-tracker Morningstar. Their growth counterparts and the S&P 500 are underwater over the same period. Fund investors' net cash flows to big-cap value funds through the end of April total some $13 billion, compared with a $3 billion net outflow for big-cap growth funds, according to Boston fund consultancy Financial Research Corp.

Consequently, fund companies have swelled the ranks of value funds by more than 30 over the past six months, topping the number they launched during all of last year -- and more are on the way. The upshot for investors is that there are already many value funds out there with long and solid track records, making this commotion little more than a predictable distraction.

"Fund companies are recognizing that the momentum has shifted to value from growth, and they're launching value-oriented funds to give their product lines a boost," says Dave Haywood, an analyst with Financial Research. "Sales reps need something to talk about, and it's pretty easy to launch a fund and put a new spin on a strategy that's been around for a long time."

Indeed, at the start of this year there were more than 550 value funds out there, the oldest of which is the (PIODX)Pioneer fund, which launched in 1928. It's not easy to get an accurate tally of new value funds because freshly minted portfolios typically fly under the radar for a few months. But an anecdotal count culled from press releases, Morningstar and fund-tracking Web site MaxFunds.com turns up 33 value rookies born during the past six months.

This list doesn't include very recent additions like the Enterprise Deep Value fund, which launched today, according to a company statement, or the Janus Global Value fund set to launch tomorrow, according to regulatory filings.

A Bumper Crop Over the past six months more than 30 funds have been born into the value pack or changed their name to fit in
John Hancock Focused Relative Value	Nov. 1
Columbia Strategic Value	Nov. 9
Alleghany/TAMRO Large Cap Value	Nov. 30
Strong Advisor Small Cap Value	Nov. 30
Strong Advisor Common Stock	Nov. 30
Federated Market Opportunity	Dec. 5
Wachovia Blue Chip Value	Dec. 26
Diamond Hill Small Cap	Dec. 29
Mercury Mid Cap Value	Jan. 1
Fremont New Era Value	Jan. 3
Putnam Mid Cap Value	Jan. 16
Principal Partners LargeCap Value	Jan. 29
Russell Select Value	Jan. 31
Managers Frontier Small Company Value	Feb. 28
BB&T Large Company Value*	March 13
Prudential Strategic Partners Focused Value	March 27
Artisan Mid Cap Value	March 28
AllianceBernstein Global Value	March 30
AllianceBernstein International Value	March 30
AllianceBernstein Small Cap Value	March 30
AllianceBernstein Value	March 30
Pioneer Value*	April 2
Nations Classic Value	April 17
Nations Global Value	April 17
Turner LargeCap Value*	May 1
Turner Mid Cap Value*	May 1
Turner Small Cap Value*	May 1
Ave Maria Catholic Value	May 1
JPMorgan Mid-Cap Value	May 1
ASAF Bernstein Core Value	May 1
ASAF Alliance/Bernstein Growth + Value	May 1
Fidelity Advisor Equity Value	May 22
BBK Cognitive Value	May 31
*Renamed or acquired. Sources: MaxFunds.com and Morningstar.

The list of rookies is eclectic, including funds from giants like Fidelity and Putnam, as well as oddballs like the Ave Maria Catholic Values fund that uses a value style focusing on "companies whose policies are consistent with the core values of the Roman Catholic Church," according to a news release.

Beyond launching new value funds -- you'll notice Alliance has rolled out four new value funds run by new subsidiary Sanford Bernstein -- fund shops are also bolstering their value offerings by acquiring value funds from other firms. The Turner Funds, for instance, added a trio of Clover funds to their growth-heavy lineup in May. They're just the latest growth shop to beef up their value offerings, following in the footsteps of growth titan Janus.

Another short cut is to simply add "value" to an existing fund's name. On April 2, for example, Pioneer changed the Pioneer II fund's name to (PIOTX)Pioneer Value. Given that changing a fund's name is both faster and cheaper than launching a new portfolio and hoping that it can get traction in the marketplace, more funds will probably get a new value label now that value's not a dirty word.

"I think we'll see more renaming," says Phil Edwards, managing director of Standard & Poor's global fund research unit. "Some of it is driven [by] the SEC wanting fund names to be more reflective of their [investment] style, but fund companies also want to have "value" in a fund's name."

This sudden interest in value funds fits perhaps the oldest play in many fund marketers' playbook: Make what's selling now.

"Fund ads and fund launches follow money flows, and money flows follow where the market has been," says Russ Kinnel, director of fund research at Morningstar.

For an example of this pattern we need look no further than the past few years when fund investors and fund companies jumped on the growth/tech bandwagons.

In 1997, 1998 and 1999 the average big-cap growth fund rang up gains north of 25%, more than doubling their value counterparts' gains and triggering a monsoon of cash. Even though large-cap growth funds sagged in tech's tough year in 2000, they still raked in a record $119.6 billion that year, according to FRC data.

The Money Train Rising returns drew record inflows to growth funds in recent years
	Large-Cap Growth Funds	Large-Cap Value Funds
2000	$119.6	$-42.1
1999	105.2	-21.9
1998	36	25.5

Executives at fund companies eyed the lucrative flows to growth and tech funds and licked their chops. From 1998 through 2000 the number of big-cap growth funds launched steadily rose, while the number of rookie big-cap value funds, where redemptions outpaced investments, flat lined.

Follow the Benjamins On heels of steep inflows, fund companies rolled out new growth funds at a quick pace
	Large-Cap Growth Funds Launched	Large-Cap Value Funds Launched
2000	47	20
1999	42	17
1998	37	26

If it's a certainty that some fund investors will repeatedly chase performance and some fund companies will routinely chase those investors' dollars, it's also true that there's usually little or no reason for you to pick through the ranks of rookie funds.

"You've already got just about every kind of fund an investor needs already out there," says S&P's Edwards. "I just don't think there are any bare cupboards anymore. Unless you're getting into something exotic like private equity, I think the waterfront is pretty well covered."

Indeed, though some studies trumpet the merits of investing in new funds, that data often ignore the fact that weak rookies fade away.

"New funds don't always work out well, like IPOs ," says Morningstar's Kinnel. "There's a survivorship bias and selective memory with new funds. A lot of funds launch and stay obscure with lousy performance until they disappear."

Indeed, when it comes to value funds there seems little reason to peruse new entries. Similar to their typically low turnover investment approach, value managers tend to stay put and there is no shortage of funds with tenured managers and stellar long-term returns.

For a manageable menu of steady options, check out this Favorite Value Funds column that sifted large-, mid- and small-cap value funds for funds with steady managers, low expenses and above-average gains.

Even a cursory look at funds like (SLASX)Selected American, (LMVTX)Legg Mason Value and (CFIMX)Clipper will cast a long shadow over their fresh-faced competitors.

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