Shunning Risk, Investors Cozy Up to Death and Taxes

You might be able to put off buying that PC, but you can't duck your own funeral. Morbid or not, that's the kind of certainty investors are paying for these days.

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As a result, shares of Service Corp. International (SRV) are up 160% over 12 months and up nearly 300% this year. Since the firm is the world's largest operator of funeral homes and cemeteries, its shares' meteoric climb merits a muted cheer. At the same time, shares of tax preparer H&R Block (HRB) are up 124% over the past year and 70% in 2001.

The stocks' gains illustrate the tectonic shift in investor sentiment since the tech sector's collapse. In 1999, some investors were all too willing to take a flier on theglobe.com. Now that few investors are inclined to take a flier on anything, many are focusing on the businesses that seem least likely to vanish: Think death and taxes. The pattern is reflected in the mutual fund world by the bargain-hunting value funds that continue to lead their tech-heavy growth colleagues.

"The market has definitely switched from prizing speculative companies and their potentially big opportunities to valuing certainty," says Scott Cooley, a senior fund analyst at Chicago fund-tracker Morningstar. "Few things are more certain than death and taxes. Those kinds of companies, like regional banks that have some degree of certainty in their businesses, have been rewarded."

Riding the Death and Taxes Gravy Train Cemetery, tax stocks outperforming for 2001

Source: Morningstar. Returns through July 23.

Value funds, which typically focus on profitable if unsexy companies with cheap shares, are trouncing higher-octane growth funds. The average small-cap value fund, for instance, is up 20% over the past year, compared with a 21% tumble for the average small-cap growth fund, according to Morningstar.

Value Rules the Roost Growth funds still in the tank
	1-Year Return	3-Year Return
Large-Cap Value	3.9%	4.0%
Large-Cap Growth	-35.4	1.3
Mid-Cap Value	15.9	8.5
Mid-Cap Growth	-31.6	7.0
Small-Cap Value	20.4	7.4
Small-Cap Growth	-21.1	9.3
S&P 500	-18.6	2.8
Source: Morningstar. Returns through July 23.

Not long ago, the roles were reversed as tech-stuffed growth funds dusted their value peers in 1999. The average big-cap growth fund, for instance, gained 39% that year, compared with a 7% bump for its value peers. Now investors are favoring the vanilla approach. In June, value funds took in nearly $8 billion, compared with $1.6 billion for growth funds, according to fund-tracker Lipper.

"I think investors are hesitant to jump back into growth, and I definitely think managers are looking for real companies with real earnings," says Phil Edwards, managing director of Standard & Poor's global funds research unit. "Interest in companies speculating on future revenues is definitely waning."

Indeed, a panel of veteran value managers at the Morningstar Conference last month in Chicago said they had no interest in buying tech stocks. The panel included James Barrow, who owns shares of Service Corp. in his (VWNFX)Vanguard Windsor II and (VASVX)Vanguard Selected Value funds. The company's shares average a 23% annual loss over five years, but it has obviously been a winner recently. Shares of casket maker Hillenbrand Industries (HB) are also sizzling, up more than 70% over the past year.

A preference for value is playing out in the sector-fund ranks as well, where funds focusing on cheaper sectors are leading the way. Financial-sector funds are up more than 19% over the past year, compared with a stunning 60% fall for the average tech fund, which rang up a 136% gain in 1999.

Stocks in financial funds average a 20.9 price-to-earnings ratio, compared with 42 for the average stock in a tech fund and 22 for the S&P 500, according to Morningstar.

The Cheaper the Better As P/Es rise, recent return falls
Sector-Fund Category	1-Year Return	Avg. P/E Ratio
Financial Services	19.2%	20.9
Real Estate	13.8	19.5
Natural Resources	6.2	22.7
Health Care	-7.4	43.8
Utilities	-11.5	20.8
Communications	-53.9	33.9
Technology	-60.2	42.0
S&P 500	-18.6	21.7
Source: Morningstar. Returns through July 23.

Of course, when the stocks of companies that work with caskets post techlike gains, you might wonder how long the current state of mind can hold. That is, you wonder if Service Corp.'s rise is ultimately a sign that the tech and growth areas are poised to recover a bit.

"At some point, [value] stocks can't keep outperforming the market," says Morningstar's Cooley. "I may actually be in favor of tilting toward growth."

The resurgence of value funds is part of a normal cycle, but it's hard to say these firms' gains don't feel like an aberration. Now that many investors are writing off growth, just as they wrote off value in the recent past, it's a good idea to remember that a blend of each style is typically a good idea for long-term investors.

Now, let's have a moment of silence for the Pauze Tombstone fund, which focused on the death industry before heading for the big sleep earlier last year. Oddly, had it survived it would be in the market's sweet spot.

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