Growth funds had a clear mission a year ago: buying stocks with growing earnings.

But these days, most companies are reporting shrinking earnings, and it's hard to fill portfolios with true growth stocks. That's forcing longtime growth managers to alter their strategies.

Some funds have shifted their sector weightings, shunning troubled industrials and emphasizing companies that focus on expanding niches in health care or technology. Other portfolio managers have lowered their sights. Unable to find fast growers, they're taking companies that are suffering relatively small earnings declines.

For the moment, it's not clear whether the new approaches will work. Funds of all persuasions are being hammered. But some growth managers seem well-positioned to thrive when better times return.

One of the stronger performers lately has been Pioneer Oak Ridge Small Cap Growth ( ORIGX), which lost 29.9% of its value in the past year, outdoing the S&P 500 by 8.7 percentage points and besting 97% of its small-growth peers. The fund aims to buy modestly priced stocks that have grown consistently for the past three years.

In the past, the Pioneer managers often bought stocks that were increasing earnings at an annual rate of 15% or more. Now portfolio manager Robert McVicker says the fund is hard-pressed to find such fast growth -- and he doesn't expect to see it again anytime soon. "Because of the credit bubble, growth rates were artificially high," says McVicker. "When the economy returns to a more normal situation, we should be able to find companies with long-term growth rates of 10% or 12%."

For the moment, Pioneer is taking companies with little or no growth. To find future winners, McVicker looks for companies that were growing steadily before the recession. He targets profitable businesses with secure niches that seem likely to resume growing when the economy rebounds.

McVicker is optimistic about seeing better returns someday because many stocks now seem like bargains. In the past, he often bought shares selling for multiples of two times their earnings growth rates. So if a high-quality company was growing 15%, he might accept a price-to-earnings ratio of 30. Now that prices have collapsed, he can find similar stocks selling for multiples that are one time the long-term projected growth rates.

A top Pioneer holding is Waste Connections ( WCN), which operates landfills and recycling operations in Western states. McVicker figures that sales could drop a bit during the recession. But the business will remain sound because people must dispose of garbage in good times and bad.

Like the Pioneer fund, RidgeWorth Small Cap Growth ( SSCTX) is making adjustments. From 2003 to 2007, RidgeWorth followed conventional growth strategies, buying companies that were gaining market share and exceeding Wall Street's earnings forecasts.

Then as trouble appeared in late 2007, portfolio manager Chris Guinther switched gears, moving away from consumer and industrial shares. He began buying defensive names that could hold up during a recession, including reliable health-care and software companies with stable franchises. "When it became clear that there was going to be significant economic turmoil, we began rotating to more resilient names that have recurring sales from longtime customers," he says.

Guinther has been avoiding makers of semiconductors and computers because they are plagued by excess supplies. He has been buying software producers that help customers control costs. A favorite holding is Ariba ( ARBA), which makes software and systems that enable major companies to purchase office supplies and equipment more efficiently. Ariba's systems collect orders from customers and make bulk purchases, saving time and money.

Another fund that modified its approach is Needham Growth ( NEEGX). In the past, Needham often preferred companies with growth rates of more than 15%. But now times have changed. "We are looking for companies that can survive and grow over the long term," says portfolio manager Bernard Lirola.

A large holding is Resources Connection ( RECN), which supplies corporate clients with temporary staff who provide accounting and legal services. Helping customers cut costs, the company should remain profitable during the recession, Lirola says. When the economy finally recovers, Resources Connection should resume delivering the kind of rising earnings that growth managers crave.
Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.

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