The job of growth fund managers just got nigh unto impossible.

Even before the terrorist attack, a good number of companies struggled to eke out growth. Now, with uncertainty clouding a near-term recovery, the situation likely will grow worse.

In the wake of the terrorist attacks, analysts at Thomson Financial/First Call estimated third-quarter and fourth-quarter earnings declines of 16.1% and 4.3%, respectively.

"You have to keep lowering your targets for what you consider to be acceptable growth ranges," says Michael Sutton, chief investment officer for PBHG and manager of the

(PBHLX)

Large Cap Growth fund. "You have to be realistic in your expectations. Low teens

growth is fair at this point."

That's a far cry from the recent past, when many of the tech stocks Sutton owned grew their top and bottom lines by 50% to 70% a year. When those companies hit a wall, he focused on stocks increasing at rates of 15% to 25%, many of which were financial stocks. But four or five months ago, financials weakened, too.

Sutton currently has an 8.5% cash weighting, partly due to the scarcity of solid new buys to absorb money from the sale of faltering stocks. He says he wants to keep that weighting under 10%, but little doubt exists that growth stocks are rare. "I own very few tech stocks," he says. "My tech weighting is around 14%. I can't find companies growing fast enough anymore."

Some money managers are extending the time line for when they expect growth to return. "Consistency of earnings growth certainly will be hard to come by in the next six to eight months," says Peter Goetz, director of large-cap equities at growth-oriented fund company Dresdner RCM. "We're trying to look out the next two to three years."

Holding Off on Defensive Stocks

Managers are also considering relaxing their growth requirement enough to buy into so-called defensive areas, which traditionally offer minimal growth. Some continue to avoid such stocks on the grounds that defensive plays don't fit their mandate. "We've been fairly disciplined about not moving into oil and oil exploration stocks, natural gas companies," says Sutton. "A lot of growth managers will move into those fields as defensive

plays. But a company that doesn't control the price of the products, whose price is artificially set by a cartel, to me is not a growth company over a longer period of time."

Two secular growth plays he likes are

Qualcomm

(QCOM) - Get Report

, a bet on the spread of CDMA wireless technology, and

Concord EFS

(CEFT)

, which processes debit card transactions for supermarkets and gas stations. Debit cards currently account for only 2% or 1% of overall volume on such transactions, but that portion will grow to 20% within the next few years, he says.

Like Sutton, Christopher Bonavico, manager of

(TPAGX)

Transamerica Premier Aggressive Growth, says he's steering clear of defensive buys like tobacco and waste management companies. He'd rather pay more for a company with better long-term growth prospects, he says, citing his recent purchase of

Adobe Systems

(ADBE) - Get Report

. "If I can pay 25 times earnings for 20% long-term growth with fantastic returns on capital, that's much better than 10 times earnings for an aircraft manufacturer with minuscule ROC, or even a defense company, for that matter," he says.

Many fund managers find former tech favorites still unattractive despite the sharp drop in their prices during the past year. Consider

JDS Uniphase

(JDSU)

or

PMC-Sierra

(PMCS)

, says Bonavico. "Look at the valuation and collapsing fundamentals."

Where to Find Growth Now

Though he has avoided hard-core defensive stocks, Bonavico has ventured into unglamorous sectors he might have shunned a couple of years ago. Case in point: His stake in drug-store chain

Rite Aid

(RAD) - Get Report

, which claims earnings growth in the low teens and an energetic new management team. "To me, that still qualifies as an aggressive growth holding, as opposed to a company with declining earnings in a secularly difficult sector like telecom equipment that's hoping for a recovery," says Bonavico.

Not long ago, a stock like Rite Aid might have been characterized as a homely turnaround value play. But Bonavico says it's pointless to get wrapped up in definitions. "You never want to get your feet in the cement of a style-box definition because you'll force yourself to own sectors that were yesterday's growth opportunities," says Bonavico.

Dowdy Old Economy stocks, however, aren't immune from the effects of a broad economic slump. Even portfolios stocked with health care, household products and energy names will struggle in such a climate, acknowledges Goetz, referring to some of Dresdner's preferred investment plays.

"It's going to be difficult for portfolios as a whole to show earnings growth next year in '02 over '01, even though '01 is going to show some very tough numbers," he says.