Value Funds Can't Spend It Fast Enough

Some value funds are closing their doors, further illustrating that the worm has turned for value and against growth.

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A Tuesday regulatory filing said the (WMCVX Quote - Cramer on WMCVX - Stock Picks)Wasatch Small Cap Value fund will close to new investors. The (LRSCX Quote - Cramer on LRSCX - Stock Picks)Lord Abbett Small Cap Value fund did the same on July 2. Back in May the sizzling mid-cap value (OAKLX Quote - Cramer on OAKLX - Stock Picks)Oakmark Select fund shut its doors. Also on Tuesday, the (VASVX Quote - Cramer on VASVX - Stock Picks)Vanguard Selected Value fund raised its minimum investment to $25,000 from $3,000 in a bid to stem rising inflows.

Fund closings are part of a now-familiar pattern that plays out in the fund world whenever a sector or style gets the wind at its back: Funds using that style start to outperform the market, and investors flood those funds with cash. Then, prudent fund shops shutter funds burdened with a glut of money, while others stuff their product pipeline with "me-too" funds. In 1998 and 1999, growth funds and tech funds went through these paces. Now it's value's turn.

The bottom line for investors: Though the reflex to sell your growth funds and jump on the value bandwagon is strong, the persistence of the value-growth cycle suggests you should always own funds in both camps, rather than following whatever's hot.

Here's Why

Value funds are essentially bargain hunters, an approach that often leads to tech-light portfolios. Their style hurt them in 1998 and 1999, when tech-laden growth peers rode the Nasdaq rocket, but it's proving its merits now. The average small-cap value fund, for instance, is up 20% over the past 12 months, compared with a 21.3% tumble for its average growth peer, according to Chicago fund-tracker Morningstar.

Small- and mid-cap value funds are the best- and third-best-performing stock fund categories, respectively, over the past 12 months. Each, along with big-cap value funds, trounces growth colleagues, which are mired in red ink thanks to the tech sector's collapse.

Value's Year Value funds have trounced growth funds over the past 12 months
	Value	Growth
Large-Cap	2.7%	-35.3%
Mid-Cap	14.80	-31.8
Small-Cap	20.0	-21.3
Source: Morningstar. Returns through July 24.

And value funds' gains haven't gone unnoticed. Investments in value funds outpaced redemptions by $38.5 billion in the first half of this year, reversing a $48 billion net outflow last year, according to a Tuesday report from Boston fund consultancy Financial Research Corp.

In June, nearly $8 billion flowed into value funds' coffers, compared with just $1.6 billion for growth funds, according to FRC.

A Cash Geyser Investors are stuffing cash into value funds -- figures in billions of dollars
	Growth	Value
Large-Cap	-$1.0	$1.4
Mid-Cap	1.4	1.5
Small-Cap	0.7	1.7
Multi-Cap	0.5	3.3
Overall	1.6	7.9
Source: Financial Research Corp. Figures through June 30.

It's no surprise that many funds are closing their doors, given the spike in cash flows and the modest size of many boutique value-fund managers. When a small firm is inundated with cash, its managers are often hamstrung as they struggle to find worthwhile places to invest the money.

Leaps and Bounds

When we look at fund companies that manage $10 billion or less, many of the 10 fastest growers practice the value style. The list includes firms like Wasatch, Harris Associates, manager of the Oakmark Funds; Wallace R. Weitz, manager of the (WVALX Quote - Cramer on WVALX - Stock Picks)Weitz Value and (WPVLX Quote - Cramer on WPVLX - Stock Picks)Weitz Partners Value funds; and Third Avenue, manager of the (TAVFX Quote - Cramer on TAVFX - Stock Picks)Third Avenue Value fund.

Nouveau Riche Some small value boutiques are flooded with money -- figures in billions of dollars
Firm	June 30 Assets	YTD Cash Flows
Fisher Investments	$2.3	$2.1
Wasatch Funds	2.7	1.2
Calamos	1.2	0.6
Shay Asset Management	2.0	0.9
Metropolitan West	1.8	0.6
Harris Associates	8.9	2.4
Ariel Capital	1.1	0.3
Artisan Partners	7.5	1.9
Wallace R. Weitz	7.7	1.6
Third Avenue	2.8	0.6
Source: Strategic Insight.

In addition, offsetting some value-fund closings are a slew of rookies rolling off the assembly line. Over the past six months, more than 30 new value funds have been born.

As you might imagine, sputtering growth funds have been going through the inverse of this bonny pattern recently. Cash flows have obviously slowed to a trickle for most. Several shuttered growth funds have reopened, including the (TIFQX Quote - Cramer on TIFQX - Stock Picks)Firsthand Technology Innovators, (VWEGX Quote - Cramer on VWEGX - Stock Picks)Van Wagoner Emerging Growth and (VPMCX Quote - Cramer on VPMCX - Stock Picks)Vanguard Primecap funds.

And many of the most speculative and ravaged tech or Net funds, like the (MANTX Quote - Cramer on MANTX - Stock Picks)Merrill Lynch Internet Strategies fund, are either merging into broader growth funds or simply cashing out.

Slam! A trio of value funds started slimming cash flows this month
July 31	(WMCVX Quote - Cramer on WMCVX - Stock Picks)Wasatch Small Cap Value	Closed to new investors
July 24	(VASVX Quote - Cramer on VASVX - Stock Picks)Vanguard Selected Value	Raised investment minimum to $25,000, plans to add a redemption fee.
July 2	(LRSCX Quote - Cramer on LRSCX - Stock Picks)Lord Abbett Small Cap Value	Closed to new investors
Source: FreeEdgar.com.

While it's blindingly obvious that the wind has shifted in value funds' favor, it's important to remember that betting the farm on growth funds a year ago was just as wrong as betting the farm on value funds turned out to be in 1998. While we know that the styles exchange the lead every few years, it's impossible to know when they'll trade places or for how long. The solution, then, is to own both styles.

If you're a recent convert to the value faith, keep in mind that in a June 30 letter to shareholders, the mangers of the (CFIMX Quote - Cramer on CFIMX - Stock Picks)Clipper fund, winners of 2000's Morningstar Manager of the Year award, said they're not finding enough attractively priced stocks to put the fund's 35% cash stake to work.