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Value Fund Sales Suffer as Performance Lags


Last year could not end soon enough for the people who run value funds.

Value funds suffered net redemptions of approximately $39 billion through Nov. 30, according to Financial Research Corp. of Boston, a mutual fund tracking and consulting firm. Thanks to the redemptions and an average total return for value funds that was 8.48 percent last year as calculated by Lipper of Summit, N.J., assets in value funds actually shrunk to approximately $674 billion as of Nov. 30, down about $10 billion from the start of the year. Sales numbers for December were not available late last week.

Although the first few weeks of the new year offered some hope that the performance of the sector might be improving compared to its peers, last year was a tough time to be in the value fund business.

"It's growth's turn now and value's (turn) tomorrow," said Louis Stanasolovich, president of Legend Financial Advisors of Pittsburgh, Pa. an investment advisory firm. "It's a normal part of the cycle."

Last year, it proved to be a painful part of the business cycle in all corners of the value fund category. For example, small-cap value funds, which started the year with $41.3 billion in assets under management, suffered $6.8 billion in redemptions and ended November with assets of about $34 billion, according to FRC. Roughly half of the approximately 600 share classes of large-cap value funds that FRC tracks had net redemptions through Nov. 30. That is roughly double the number of large-cap value funds in net redemptions in 1998, according to FRC. Assets in the sector of about $576 billion through Nov. 30 were up only about one percent for the year.

Mid-cap value funds suffered also. The category had redemptions of about $12.1 billion through Nov. 30, ending the period with assets under management of $63 billion. Assets under management were almost $72 billion at the start of the year. By comparison, value funds had net sales in all categories of an aggregate $21 billion in 1998, according to FRC.

There is little fund companies can do to stop the erosion of assets from value funds without a change in the market, according to mutual fund executives and consultants. Fund companies largely are forced to rely on their historical message that value investing is a sound long-term strategy and that market sectors with top performance typically rotate, said Burton Greenwald of Philadelphia, a mutual fund consultant.

How well a company has projected its value message over the years is key to its ability to hold onto assets, Greenwald said. There is very little that a fund company could do once the market turned against value funds, he said.

Large and small fund companies have been repeating their message about the wisdom of value investing. Putnam Investments of Boston has seen net redemptions of about $2.5 billion in its $13.3 billion Fund for Growth & Income class B shares, according to FRC. Putnam has reiterated the message that value investing makes sense and market performance tends to rotate among sectors, a company spokesperson said.

Bernie Horn, manager of the $20 million Polaris Global Value Fund of Boston, spends time on the telephone with shareholders explaining the reason for his investments. But that has not changed from Horn's usual strategy of talking to shareholders and providing detailed quarterly reports identifying the fund's investments and the rationale for them. The history of persistent communications helps when the market turns contrary, Horn said.

During the second quarter, value funds staged a small rally. That gave some value fund managers hope.

It also looked like an opportunity. For example, in September, MFS Investment Management of Boston - known for the strong performance of its growth funds - began a marketing campaign to promote its value-oriented $146 million Equity Income Fund and a high-yield fund.