Value-Fund Surge Has Growth Managers Sporting Sackcloth

Like the tech stocks that made them stars, growth-fund managers like Ron Elijah are in a blue period. And like the shareholders of their sagging funds, they're probably muttering a blue streak, too.

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Elijah and RS Investments issued dueling press releases from their respective San Francisco offices Thursday night, saying he wouldn't be running the struggling (RSVPX)RS Value + Growth or (RSIFX)RS Information Age funds anymore. Elijah left RS in March 1999 to form Elijah Asset Management, but kept running the two RS funds. Now RS -- a former unit of Robertson Stephens that is now closely held -- is handing the reins to internal managers, rather than renewing Elijah's contract, which expired Tuesday.

Elijah is the latest growth manager to get the ax, but he surely won't be the last. With many fund companies cutting staff and trimming fund offerings as profits plunge, sputtering tech funds and their managers are increasingly on the firing line.

"I think it's quite possible we'll see [growth managers] on a shorter leash," says Scott Cooley, a senior fund analyst at Morningstar. "When the operating environment gets tough, that's what happens. Think back 18 months ago to the value managers that got cut. They just didn't have much slack. Growth folks are in the same boat now."

Turnabout's Fair Play

Indeed, just last year respected value managers like George Vanderheiden of Fidelity and Robert Sanborn of Harris Associates left their posts, in January and March, respectively. Each had suffered disappointing returns in recent years as their price-conscious approach kept them from riding white-hot tech stocks. Since the tech-laden Nasdaq's peak in March 2000, however, value types have been replaced on the hot seat by their tech-loving growth colleagues.

After trouncing their value peers in 1998 and 1999, the average large-cap growth fund is down more than 33% over the past 12 months, compared with a 3.2% gain for the average large-cap value fund.

Growth. Riiiiiiiiiiiiiight.
	1-Year Return
Large-Cap Growth	-33.8%
Large-Cap Value	3.2
Mid-Cap Growth	-31.1
Mid-Cap Value	14.9
Small-Cap Growth	-22.6
Small-Cap Value	18.7
Source: Morningstar. Returns through July 12.

Elijah is just the latest growth-fund manager to be dismissed. On June 22 Vanguard replaced subadvisers David Fowler and J. Parker Hall of Lincoln Capital Management after the (VWUSX)Vanguard U.S. Growth fund trailed its competitors in 1999's run-up and last year's downturn. Before that, the fund had beaten its average peer for five consecutive years.

And in April Putnam Investments dismissed five portfolio managers, including veteran growth managers Charles Swanberg and Anthony Santosus, who helped run the $30.9 billion (PVOYX)Putnam Voyager fund and the $8.5 billion (PVISX)Putnam Vista fund, respectively. The funds were growth flagships for the Boston shop and both trail their average peer over the past five years, according to Morningstar.

With Elijah's departure, the Value + Growth fund will go to John Wallace, who has kept the (RSMOX)RS MidCap Opportunities fund ahead of its peers since its 1995 inception. Jim Callinan and Stephen Bishop, whose (RIAFX)RS Internet Age fund has lost less than its Net-fund peers over the past year, will take over the Information Age fund.

Mixed Results

Elijah, who still runs the Aetna Technology fund, had managed the Value + Growth fund and tech-focused Information Age fund since their respective launches, in 1992 and 1995. While the diversified fund trails most of its peers over the past one, three and five years, the tech fund actually leads its average competitor over the same stretches.

Split Decision Elijah faltered on Value + Growth...

...but Information Age was beating its peers.

Source: Morningstar. Returns through July 12.

But the removal of Elijah and co-manager Roderick Berry from the tech fund underscores the minimal value of relative performance when losses are steep. Over the past year the fund is down a whopping 54.9%, compared with 57.3% for the average tech fund. A $10,000 investment in the fund at the start of last year would have been worth $5,165.98 at the end of May, according to Morningstar.

Given the severity of those losses, it's not surprising that investors aren't lining up to buy shares of stock funds in general and tech or tech-heavy growth funds in particular. In the first five months of this year, stock funds took in $37.8 billion, compared with $193.2 billion in the same period last year. Through the end of April, the redemptions from tech and big-cap growth funds outpaced investments by some $4 billion, according to Boston fund consultancy Financial Research.

Making matters worse, there are probably far too many growth and tech funds out there. After 1999, when the average tech fund gained 136% and billions of dollars gushed into the category, fund companies flooded their product pipelines with tech portfolios. There are 145 tech funds, but only 47 have been around for three years and many others have been liquidated this year. More than 90 tech funds are below the $100 million asset threshold -- the break-even point for most funds.

While growth investing and the tech sector will certainly get the wind at their back at some point, these stark figures, combined with layoffs at big fund shops like Fidelity, Putnam and Janus, point to even more near-term pressure on growth managers. In Thursday night's prepared statement, Elijah dissed his former employer, saying, "Elijah Asset Management plans to focus on its faster-growing mutual fund partners and its alternative investment products."

Today might indeed turn out to be a great moment to start a tech or growth fund. But it's hard to believe that faster-growing mutual fund companies are really shopping for growth or tech talent right now.

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