Value investing back in style: markets are shaky. Bellwhether growth stocks have been hit hard. It is time to consider value

Money Digest, Sept, 1999

There has always been a split between value investors and growth investors. Value investors purchase a stock because they believe that the company and its business are basically sound and the company's stock price will increase as more and more investors recognize the value of the stock. Growth investors, on the other hand, believe that a stock has `momentum' and therefore will quickly move up in price.

In general, growth stocks are considered to be more risky than value stocks. Momentum is more fleeting than value.

Yet the recent past has not been good for value investors. Internet stocks with no earnings and an uncertain future have been favoured by investors over value stocks. Mutual funds that invested in value stocks performed poorly.

But more and more investors are getting nervous. In the past few weeks many Internet stocks have lost as much as 50% of their value. Even such names as America Online, Dell Computer and CMGI have not escape the punishment.

It appears that investors are returning to value stocks. After all, value stocks are less volatile and have more downside protection.

For instance, Trimark Canadian Fund, which returned just 3.7% per year in the previous two years, returned 16% in the past six months. Similarly ABC Fundamental Value Fund, which returned 3.5% per year in the previous two years, returned 16.2% in the past six months. Templeton Growth Fund, which returned 4.1% per year in the previous two years, returned 16.5% in the past six months. Cundill Value Fund, which returned 4.4% per year in the previous two years, returned a spectacular 30.8% in the past six months.

This is true of individual stocks. While growth stocks got punished in the past six months, value stocks appreciated.

The stock market could grow at a breaknect speed for a few more years. But it is not very likely. If you are concerned, it might be time to get back to value.