Value Funds Could Take the Lead

NEW YORK ( TheStreet) -- Investors have begun embracing unloved financial and resource stocks lately. That has given a boost to value funds, which hold out-of-favor shares. During the past three months, large value funds have returned 7.8%, while large growth funds -- which focus on stocks with higher prices -- gained 6.4%, according to Morningstar.

The leadership of value stocks represents a shift from recent trends. Since the financial crisis, investors have generally preferred growth names, including technology and consumer stocks. Favored companies delivered growth at a time when many businesses have struggled.

Can value funds continue leading? Yes, argues Ted Baszler, a diehard value investor who is portfolio manager of Heartland Select Value ( HRSVX).

Baszler says that market leadership alternates. First value moves into the front for five or six years, then growth takes the lead for a similar period. After growth led in the bull market of the late 1990s, value moved in front from 2000 through 2007. Since then growth has been on top for about five years, so value is due for a period of outperformance.

Baszler says after the financial crisis, value funds were held back partly by the poor performance of financial stocks, which account for 26% of the Russell 1000 Value Index. But the outlook for financials has been improving as the economy continues plodding forward. He says the economy is now being held back because of the uncertainty about the presidential election.

"After the election, there will be more political clarity, and you will see a pickup in the economy," he says. "A stronger economy would benefit financials and value stocks generally."

Many investors divide their equity portfolios equally, putting half in growth and half in value. But this could be a time to overweight value. Sound funds to consider include American Century Value ( TWVLX), Invesco Van Kampen American Value ( MSAVX) and MFS Value ( MEIAX).

The MFS fund is among the steadiest choices. The portfolio includes many familiar blue chips with strong balance sheets and dominant market positions. Portfolio manager Kate Mead looks for companies that can maintain consistent profits.

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