Hunt for ‘Value’ Boosts Stock Funds

Investors’ new hunger for “value” shares helped drive stock mutual fund cash inflows in the first quarter to their best levels in a year and a half.

Despite a shaky market overall, stock funds took in a net $54.7 billion in cash in the quarter, the highest since the third quarter of 2000, the Investment Company Institute said Monday.

The total was boosted by a $29.3-billion net inflow in March alone, the best for any month since April 2000, said ICI, the fund industry’s chief trade group.

The funds attracting the most interest are those that focus on so-called value stocks--shares priced relatively low compared with underlying fundamentals such as earnings and sales, industry data show.

The fund cash inflow figures, which measure new purchases minus redemptions, indicate that many investors are ignoring the continuing plunge in “growth” stocks such as technology issues--the leaders of the late-1990s market boom--and have shifted their attention to the new leaders in the value sectors of the market.

In the first quarter, value-style funds netted $28.9 billion, far outpacing the growth and “blend” (a mix of growth and value) fund styles, according to Financial Research Corp., a consulting firm in Boston that estimates fund cash flows. It was the highest quarterly intake for value funds since Financial Research began tracking flows in 1986.

Growth-sector funds, by contrast, got only $3.4 billion in total net cash in the first quarter, Financial Research said.

Meanwhile, bond funds also continued to attract money in March, while ultraconservative, low-yielding money funds had a big outflow. Bond funds took in a net $6.8 billion, while money funds had a $53-billion outflow, some of which may have been related to annual tax payments by investors.

For stock funds, March’s cash inflow was helped by the 3.7% rise in the Standard & Poor’s 500 index for the month, after February’s slide, analysts said.

But even as the market has pulled back in recent weeks, major fund companies including Fidelity, Vanguard Group, T. Rowe Price Group and Charles Schwab Corp. say stock funds have continued to attract money, though not necessarily on March’s pace.

Schwab had a net inflow of $1.3billion this month for stock portfolios in its fund “supermarket” through last week, versus an inflow of $3.1 billion for all of March. Vanguard estimates an inflow of $2.2billion this month, versus $4.6billion in a “standout” March, according to spokesman Brian Mattes.

At T. Rowe Price, value funds and other conservative stock funds are pacing “very strong inflows” in April, said spokesman Steve Norwitz.

Fund purchases are typically strong in the first quarter, fueled by retirement-plan funding, but this year’s solid inflows “offer evidence that investor sentiment is becoming positive” toward the market, or at least toward key sectors, said Chris Brown, director of research at Financial Research.

Some analysts say heavy purchases of value funds are perpetuating the gains in stocks in those sectors, especially for small-cap value stocks that have been in the market’s sweet spot for two years.

“The strong performance of mid- and small-cap value stocks is now being driven more by the flow of funds than by any fundamental improvement [in the companies],” Thomas McManus, market strategist at Banc of America Securities in New York, said in a recent research report.

The average small-cap value fund was up 9.8% and the average mid-cap value fund was up 3.8% year-to-date through Friday, according to Morningstar Inc. By contrast, the average large-cap growth fund was down 9.1%.

In the late-1990s and early 2000 it was large-cap growth stocks, and funds, that led the market as investors piled in--until the technology-stock bubble burst.

Value-oriented fund companies whose sales surged in this year’s first quarter, according to Financial Research, include American Funds, which took in a net $12.6billion in its stock and bond funds combined, versus $4 billion in the first quarter of 2001; Dodge & Cox, which took in $2.6 billion, versus $715 million; and small-cap value specialist Royce Funds, which took in a net $1.3 billion, versus $391 million.