Why Value Funds Could Lead the Markets

NEW YORK (TheStreet) -- Plenty of academic studies show that unloved value stocks have outdone high-priced growth shares over the long term. But value has struggled lately. During the past five years, the Russell 1000 Growth index has returned 4.1% annually, while the Russell 1000 Value lost 1.6%. Value also trails for the past decade.

Growth stocks have led partly because financials account for a heavy weighting in the value benchmark. During the financial crisis, banks and insurance companies were crushed, and they still sell at low multiples compared to historical levels.

This year, cyclical stocks -- such as industrials and natural resources -- have trailed and held back the Russell Value benchmark. The cyclicals, which rise and fall with the economy, do best in booms. With the growth in profits slowing lately, investors have shifted away from cyclicals and toward growth champions, such as Apple ( AAPL), which deliver steady profits in hard times.

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If the economy remains sluggish, as many analysts expect, then growth could continue leading this year. Still, long-term investors should consider overweighting value funds now. After trailing recently, value stocks look cheap, and odds are good that they will overtake growth in coming years. In the past, value stocks have suffered periods of underperformance, but they have always rebounded.

Some of the steadiest value funds focus on dividend-paying stocks. The dividends help to cushion results in downturns. Top choices for investors seeking large value funds include Federated Equity-Income ( LEIFX), Nuveen Dividend Value ( FFEIX), and Oppenheimer Equity Income ( OAEIX).

The Oppenheimer fund has proved particularly reliable in downturns, outdoing peers by wide margins. During the past five years, the fund returned 2.8% annually, surpassing 96% of large value competitors. Aiming to deliver rich income, portfolio manager Mike Levine follows a distinctive strategy. He puts about 80% of assets in dividend-paying stocks and most of the rest of the portfolio in convertible securities. The convertibles tend to be relatively steady because they generate bond-like income. A big stake in convertibles helped to limit the fund's losses during the downturn of 2008.

Levine holds a mix of different kinds of dividend-paying stocks, including familiar blue chips and less well-known small-caps. While some holdings provide high dividend yields and little growth, other stocks in the portfolio have meager dividends that are growing rapidly. The aim is to maintain a diversified portfolio that can produce income and growth.

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