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Value investors will get day again

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It comes as no surprise to stock watchers that the go-go days of growth stocks in the bull market have been hard on value investors.

Value players, you will recall, are the sharp-eyed investors who snag shares of companies with strong fundamentals andwho trade at low price-to-earning or low price-to-book ratios. In other words, they buy good companies on the cheap.

For a brief period this spring, it looked as though value investing had emerged from a slumber — much like the groundhog in winter. But just like the groundhog, the sector retreated into the shadows after about 10 weeks, yielding the spotlight to a renewed spate of growth investing, according to data from Morningstar, the mutual fund analysts.

"People did seem to be interested in value investing," said Scott Cooley, a senior analyst with Morningstar. "It lasted only 2 1/2 months. In June and July, growth funds again handily outperformed value."

After a sharp rise in market indices in the first quarter, the NASDAQ composite peaked on March 10 before declining precipitously as technology stocks were pounded. Investors quickly shifted their focus from growth to value, according to the Morningstar data. From March 10 through the end of May, total return for large-cap growth funds declined 10.5 percent. But interest in the value sector rose 9 percent during the period.

"I don't even know if it was renewed interest in value or disinterest in growth," said Bill Turner, a member of the value team for One Group, a family of mutual funds. "Regardless, value seemed to be the beneficiary."

Triggering the out-performance of value funds, said Turner, was concern that growth stocks had become overvalued amid a potentially overheating economy and worries about Fed interest rates hikes. Since then, the economic numbers show that the course of the economy is more benign. The result: From the end of May through June 30, total return for large-cap growth funds jumped 13 percent. Total return for large cap value, by comparison, increased 1.5 percent during the six-week period.

Value investing once dominated the market. From the bottom of the market in 1974 through mid-1989, notes Jeffrey Molitor, director of portfolio review for the Vanguard Group, value walloped growth. Since then, with the exception of a few short-term periods, the huge market for growth investing has come at the expense of value.

"The markets will most likely rotate back so that value will have its day again," said Molitor. "But it has been a longer cycle than a lot of investors like. So it's not clear what a full market cycle is anymore."

What's more, said Molitor, investors are experiencing much greater levels of uncertainty about where to put their money."

Meantime, investors increasingly are basing investment decisions on trailing returns instead of taking into account their own long-term investment goals. That means they are setting themselves up for disappointment as they seek to match yesterday's returns.

"The only returns that are available," said Molitor, "are those you get going forward.