Forget the bull-vs.-bear battle. Try the race between the tortoise and the hare, a pair sometimes referred to as value stocks and growth stocks.

Growth stock funds finally showed their rabbit-like speed, passing value stock funds in the last month. Through April 7, large-cap growth funds were up 2.65%, while large-cap value ones were up 1.32%, compared with a 1.61% return on the S&P 500, according to Morningstar.

The victory is worth noting because large-cap growth funds have consistently underperformed their slow and steady competitors in the first quarter of 2004, as well as just about every other period in the past 10 years.(See chart.)

But before value investors consider jumping on the growth-fund bandwagon, they should take a closer look at the holdings of their funds, because they may find some surprises. What they once thought was a growth stock during the bubble might have been transformed into a value stock during the bust. And of course, vice versa.

Growth Spurt

Rosanne Pane, a mutual fund strategist at Standard & Poor's, says growth funds would have outperformed value for the entire first quarter of 2004, but their momentum was interrupted in February and March after consumer confidence numbers started to fall and investors became cautious about both the strength of the economic recovery and the longevity of the stock market rally.

For the full first quarter of 2004, S&P reported that large-cap value funds outpaced large-cap growth ones 2.51% to 1.36%, while the S&P 500 gained 1.51%. Morningstar's quarterly results came in slightly different, with large-cap value returning 2.37% and large-cap growth returning 1.4%.

Over the past four weeks, however, Pane says investors have recovered from their late winter crisis of confidence, particularly with the surge in March nonfarm payrolls.

"Standard & Poor's believes that growth will reassert itself when first-quarter earnings come out, and currently recommends that investors overweight information technology, health care and consumer discretionary," says Pane.

Value Funds Grow on Investors
Performance Review
Fund Category 1 Month YTD 3 Month 1 Year 3 Year 5 Year
Large-Cap Growth 2.65% 3.22% 1.28% 29.76% -1.19% -4.47%
Large-Cap Value 1.32 3.45 2.43 35.25 3.45 2.88
Source: Morningstar

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