bonny year is making the fund world's tortoises look pretty quick.
G Force: 1999's Highflying Funds Ravaged by Gravity
On the Hook: Fund World Has a Big Bet on Comcast as It Bids for AT&T Broadband
The Best and Worst Tech Funds Since the Nasdaq's Peak
Building the Perfect Portfolio
In an odd twist, price-conscious and tech-shy value funds are now riding a stock that many growth managers sold last year. The upshot: A value approach and tech investing aren't mutually exclusive.
For the most part, value funds focus on the battered stocks of companies with steady, if unspectacular, earnings growth, while growth funds hold the pricier shares of companies growing at a faster clip than the market and competitors. Microsoft has been firmly in the growth camp historically. But its rocky 2000, punctuated by a
since-overturned court-imposed breakup order, put it on value managers' radar screens. Now, Microsoft shares are up 65% for the year after Thursday's 7.7% rise on
a strong fourth-quarter revenue forecast.
"Its valuation wasn't at a premium to the market, so value managers got interested," says Scott Cooley, a senior fund analyst at
Indeed, a third of large-cap value funds owned Microsoft shares at the end of May, up from 12% at the end of 1999, according to the most recent data from Morningstar. Meanwhile, the number of large-cap growth funds holding the stock dropped to 64% from 88%. Partly as a result, the average large-cap value fund is up 1.8% over the past year, compared with a 34.4% loss for its average growth counterpart.
Liking What They're Seeing
... as growth managers flee
Funds like the
Enterprise Managed and
Orbitex Focus 30 funds have some 4% of their assets in Microsoft, helping each lose less than the
S&P 500 so far this year. The $56.2 billion
Investment Company of America fund, the nation's largest value fund, bought 400,000 Microsoft shares in the first quarter. The stock accounted for 0.7% of the fund's assets on March 31, its most recent portfolio report.
On the flip side, many managers of big-cap growth funds dumped the stock as it fell more than 60% last year. The
Janus Mercury fund, for instance, liquidated its 1.8 million-share position last year, according to Morningstar.
"Some of the growth guys got caught up in the momentum on the downside," says Howard Ward, manager of the
Gabelli Growth fund, which has 1.1% of its assets in Microsoft. "They got frustrated with the slowing growth and just the negative price action."
Many of those frustrated folks who marched away from Microsoft in search of greener pastures found themselves in a trap, as the
Nasdaq lost 39% last year.
"It's funny to think people were so down on Microsoft because they expected single-digit earnings growth," says Cooley. "The optical networking companies and data storage companies where the momentum folks gravitated were the last to crumble. But they crumbled."
are down 74% and 90%, respectively, over the past year. And data storage shop
is off 72% over the same period. Microsoft, on the other hand, is down just 17% over 12 months. Among big-cap tech stocks, only
, up 57%, has risen more this year.
Still, value managers may be looking elsewhere for bargains after Microsoft's run-up. The stock currently trades at 37 times forward earnings, compared with 22 for the S&P 500, according to
And some value managers' Midas touch with Microsoft doesn't mean they're becoming closet tech specialists. Indeed, most have stayed out of Microsoft and see no reason to buy now.
"We have not elected to buy Microsoft and feel the stock's premium
valuation vs. nontech industry leaders has remained too high," says Bill Nygren, manager of the mid-cap value
Oakmark Select funds. "Our largest holdings are companies like
. They're strong players in their industries and sell at 10 to 15 times next year's earnings. Microsoft is a great company, but to pay its multiple seems excessive."
While some growth managers missed the boat on Microsoft's gains, they could be buoyed if the company's solid revenue numbers signal that demand for tech products is rebounding.
"I think Microsoft's news yesterday was good for the company, but it's also more telling in its implications for other tech companies," says Gabelli's Ward. "Microsoft is a chicken tech stock. It's a safe harbor during a hurricane, but it's also a window into corporate tech spending. So good news for Microsoft is good news for tech."
Chicken or not, those value managers who bought shares last year and early this year still have their bragging rights.
Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. 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
email@example.com, but he cannot give specific financial advice.