Value investing, the patient contrarian strategy of picking stocks perceived to be trading for less than their intrinsic worth, isn't having an easy 2008.
The usually steady financial stocks that dominate many value portfolios are in disarray; periods of uncertainty typically disrupt the value strategy; and disenchanted investors already hold portfolios packed with deflated value stocks.
Within the value category, large-cap funds are down 14 percent, mid-cap funds down 9 percent and small-cap funds down 5 percent, according to Lipper Inc.
More than a few cynics have proclaimed value investing to be dead. Its plight hasn't been this dire since the height of the tech bubble.
Not only have trends seemingly shifted against it, but there's been poor stock-picking by previously savvy value managers. Many who analyze value measures such as price-to-earnings and price-to book ratios to find bargains seem to have lost their touch.
Have events rendered irrelevant the mantra of luminaries Ben Graham, John Templeton, Warren Buffett and Martin Whitman? Does it make sense to keep buying what appear to be bargains when they keep sliding further in price?
Here's one response: Preston Athey, portfolio manager of the respected T. Rowe Price Small-Cap Value Fund (PRSVX), has lately been thinking about a famous Business Week cover story.
"The Death of Equities: How inflation is destroying the stock market" roared the publication's cover of Aug. 13, 1979.
"I'm reminded of that cover because it appeared around the start of an unbelievable 20-year bull market," chuckled Athey, managing director of that $5.3 billion value fund, which is up about 1 percent this year. "There's no death of value investing either."
Since Athey took charge of the conservative, low-volatility fund in 1991, it has turned in a 14 percent annualized return. It is a "no-load" (no sales charge) fund that requires a $2,500 minimum initial investment and has an annual expense ratio of 0.81 percent.
"One reason my record is not too bad is because I take a somewhat eclectic view of what value is," said Athey, who says too many investors consider a stock selling at 30 times its earnings a value stock simply because it once sold for 50 times earnings. "You have to be nimble and willing to buy stocks in sectors and industries not typical in value screens."
Some unusual holdings in his portfolio are the for-profit education firms Apollo Group Inc. (APOL), DeVry Inc. (DV) and Corinthian Colleges Inc. (COCO), which he considers well-equipped to successfully weather lingering doubts about student loans.
His largest portfolio holdings include Landstar System Inc. (LSTR) and FTI Consulting Inc. (FCN) in business services, plus Penn Virginia Corp. (PVA), Encore Acquisition Co. (EAC) and Tetra Technologies Inc. (TTI) in energy.
It is time for investors to consider moving more of their stock allocations into value-oriented strategies, said John Buckingham, chief investment officer for Al Frank Asset Management in Laguna Beach, Calif. Market history has shown that whenever value has significantly underperformed, that is subsequently followed by lengthy periods of outperformance, he said.
"Given the plethora of bargains from which to choose, investors can benefit from exposure to undervalued stocks across the capitalization and volatility spectrum," said Buckingham, who added an important caveat: "The exact timing when value stocks will reach their intrinsic values is always uncertain."
Growth investing, which is value's more aggressive capital-gains-oriented counterpart, seeks those stocks whose earnings are expected to grow at an above-average rate compared to the industry or stock market. Unlike value investors, growth investors are willing to pay up to capture growth. They often smirk at a long-term buy-and-hold philosophy.
Yet cycles in which growth investing dominates value are just that--temporary movements, said Paul Nolte, investment director for Hinsdale Associates in Hinsdale, Ill.
"Right now, growth investing is kicking the pants off value investing primarily because value indexes are heavy in financial stocks," said Nolte, noting that since 1982 each investment style has enjoyed positive cycles lasting from three to seven years. "In the 1990s, growth was king, in the early 2000s, value was king, and now it's back to growth again."
Wal-Mart Stores Inc. (WMT) and Amgen Inc. (AMGN), selling at their cheapest levels in years, both fit Nolte's criteria for value stocks.
While value indexes have performed better than growth indexes over the past three decades as a whole, it nonetheless may not yet be their time to shine again, said Mark Salzinger, publisher and editor of The No-Load Fund Investor newsletter (www.noloadfundinvestor.com).
"In my judgment, growth funds are still going to do better for a while and my model portfolios are tilting toward growth," Salzinger said. "But don't give up on value altogether because over the long run it has outperformed growth and you really should still own value funds."
Among quality value fund choices with solid potential for a rebound, Salzinger recommends American Century Mid Cap Value Fund (ACMVX), Dodge & Cox Stock Fund (DODGX) and T. Rowe Price Equity Income Fund (PRFDX).
Value and growth investing may seem to go together like fire and ice, but both do have a place in an individual investor's portfolio, which is always a balancing act. At some point, we may even expect to hear the words: Growth investing is dead.