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Coke or Pepsi? Biggie or
Tupac? Growth or value? For
decades, investors chose their
stock mutual funds from one
of two distinct camps. On
one side were growth funds,
which bought only the most dynamic stocks
with the fastest-rising revenues and profits.
On the other were value funds, which hunted
the bargain bin for stocks with cheap prices
relative to their earnings.
Today, just like more people are choosing
neither Coke nor Pepsi, investors are pulling
out of both growth and value stock funds.
Instead, they re pouring cash into broad
index funds and other options that don t
pigeonhole themselves into one of the two
The moves are the result of several trends
that are reshaping the investment industry.
Chief among them: People are looking for
ever-simpler ways to invest, and they re
opting for index funds that track the broad
market. So, instead of holding a small-cap
growth fund plus a large-cap value fund
plus a mid-cap growth fund, more investors
are holding just one fund that tracks the
entire stock market.
The numbers bear out the change in pref-
erence. Investors pulled a net US$36.2 billion
from US growth stock mutual funds and
exchange-traded funds in the 12 months
through January, according to Morningstar.
Another US$42.6 billion left US value stock
At the same time, US$12.5 billion went
the opposite direction, into "blend" funds,
which own a mix of both growth and value
The trend isn t as strong with foreign
stocks, where investors are still putting money
into growth and value stock funds. And even
with U.S. stocks, growth and value funds
still command big piles of dollars. Together,
they control US$2.9 trillion, more than the
US$2.7 trillion that sit in blend funds. But
the trend is moving toward US blend funds
eventually overtaking their growth and value
One reason for the shift is that investors
are tired of picking which philosophy will
do best. Or, rather, they got tired of getting
it wrong when they tried to pick which would
Growth and value stocks tend to take turns
at the top, with growth leading for some
years before ceding leadership to value.
Growth stocks, for example, were in favor
during the dot-com boom of the late 1990s.
Investors at the time were excited about the
"new economy" and were more interested
in companies attracting "eyeballs" than in
those making profits.
After getting burned by the dot-com bust,
chastened investors turned back to value
stocks. For seven years, the value stocks in
the broad Russell 3000 index beat their
growth counterparts, from 2000 through
2006. After that, growth stocks regained the
lead and had better returns in five of the
following seven years.
So instead of guessing whether growth
stocks will do better than their value coun-
terparts, investors are simply buying broad-
market funds that own both groups.
Perhaps the biggest reason for the trend
is the migration into index funds generally,
says Alina Lamy, a senior analyst at Morn-
ingstar. After seeing the majority of actively
managed stock mutual funds fail to keep up
with indexes, investors have been streaming
into options that merely try to match the
index rather than beat it.
Some index funds focus on just growth
or value stocks. But the most popular ones
cover broad swaths of the market and include
Vanguard s Total Stock Market Index fund,
for example, has US$385.9 billion in assets
and tracks the entire US stock market. It s
also more than 10 times as big as Vanguard s
Value Index fund and eight times as big as
its Growth Index fund.
Before dumping growth or value stock funds and
going into these broad-market index funds, investors
need to be OK with getting the market s returns. With
index funds, they ll no longer have the chance of
beating the market. They may also trigger a capital-
gains tax bill, if they re selling growth or value funds
that have been sitting in a taxable account for many
In exchange, though, investors are getting lower
fees and the assurance that they won t do any worse
than the market. AP's STAN CHOE
Beyond growth and value
Investors are tired of choosing
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