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Growth Fund of America Opens Our Ima Winner Fund Club
I Own What?! Some Financial Funds Can't Buy Enough Cisco
10 Questions With Growth Maven Jeff Van Harte and Value Guru Bill Nygren
This Week's Mutual Fund Winners and Losers
The ETF and HOLDRs Weekly Report
Tech's collapse may have taught us a lesson, but this year's headlong rush into value funds shows we haven't learned it.
Last summer, tech and growth funds were starting to show some wear as tech stocks sagged. Returns slumped, but the funds remained bestsellers, thanks to the buy-the-dips crowd. Meanwhile, value funds kept bleeding assets.
A year later, the tide has turned: The average tech fund has lost 55% of its value. Now, all the bestselling funds are lower-octane bond and tech-light value funds.
But the massive shift suggests that investors who once overplayed tech now might be placing too many chips on value funds. Rather than diversifying into a stable value-growth balance, they continue to chase returns. In doing so, they risk being blindsided again whenever the market's wind shifts.
Perhaps nothing so starkly illustrates these shifting tastes than comparing the top-five selling funds halfway through this year with those from the first half of 2000.
Last year the list was all growth funds, including two from
Enterprise) and two from
Growth Company and
This year' s list has two bond funds, the top-selling
Total Return fund and the
Total Bond Market Index fund. The only growth fund is a holdover from 2000's faves: the
Growth Fund of America. That fund, the first entrant into our
Ima Winner Fund Club, has lost 14.8% over the past year, but that trounces more than 90% of its peers and beats the
The other two stock funds on the list are the big-cap value
New York Venture fund and the large-cap blend
Dividend Growth fund. Each follows a conservative strategy and had just 17% of its assets in tech stocks at the end of the first quarter -- a below-market weighting at the time.
Indeed, this year's bestsellers, which have taken in $16 billion of stock funds' $60 billion in net sales this year, mark an about-face from a year earlier. In the first half of last year just one value fund,
Janus Strategic Value, cracked the top-20 sellers; that probably had more to do with growth titan Janus' sales momentum than investors' interest in bargain-hunting funds. This year, aside from the Growth Fund of America, just two growth funds are among the top 20:
MFS Massachusetts Investors Growth and
Smith Barney Aggressive Growth.
Both lists are dominated by funds that beat the S&P 500 over the past 12 months. A fund's relative performance -- its ranking vs. its peers -- seems less important. For instance, the Davis New York Venture fund's 8.5% loss over the past year trails nearly 90% of its big-cap value peers, but beats the market. And the Fidelity Growth Company beats its peers over the past one and three years, but its 30.5% loss over the past year nearly doubles the market's fall.
The makeup of these lists -- all growth last year, all value this time around -- tells us that many folks are investing in funds that are going up now, rather than spreading their money among growth and value styles (though more than $3.5 billion has flowed into Vanguard's broad
500 Index and
Total Stock Market funds).
The idea with diversification or asset allocation is typically to buy shares of solid funds in myriad styles, but as usual the bestsellers are a fairly homogeneous bunch. It's hardly surprising to see fund investors turn away from growth funds since most have fallen hard over the past year. Consider that since the tech-laden
Nasdaq Composite peaked on March 10, 2000, the
Fidelity Aggressive Growth fund has fallen a stunning 71%, according to Baseline/Thomson Financial.
No doubt losses like those are partly why cash flows to stock funds are half what they were last year. Net cash flows to stock funds in the first six months of this year were $60.5 billion, compared with $124 billion over the same period last year, according to Boston fund consultancy Financial Research Corp.
Still, methodically and thoughtfully building a portfolio with exposure to growth, value and bond funds makes more sense than trying to time one style's hot streak.
Here's a look at how you might spread your money among small-, mid- and large-cap growth or value funds to build a diversified portfolio -- and a shortlist of funds we like in each category.
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.