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.

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) - Get Report

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.

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) - Get Report

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.

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.

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) - Get Report

Selected American,

(LMVTX) - Get Report

Legg Mason Value and

(CFIMX) - Get Report

Clipper will cast a long shadow over their fresh-faced competitors.

Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

imcdonald@thestreet.com, but he cannot give specific financial advice.