Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.wpost From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: 'Growth' and 'Value' Funds Offer Investors a Choice, and Risks=BY STAN HINDEN= Date: Wed, 18 Nov 92 04:53:56 EST Message-ID: <15.1992Nov18.045356@AmeriCast.com> It's time to play that ever-popular Wall Street game, "Beat the Market!" What's that you say? It's an old game? Well, true. But don't try telling that to the investment gurus at two of the world's biggest mutual funds. After years of computing and calculating, the Vanguard Group and Dreyfus Corp., the latter teaming with Wilshire Associates Inc., think they've got a way to beat the market. They have carved up the stock market - or at least their versions of the market - into two basic groups: growth stocks (those with rapidly growing profits) and value stocks (those selling at relatively cheap prices). And they are giving investors a chance to choose which investment style is more timely or better suited to their needs. The value and growth strategies are centered on the index con- cept. The index fund was created a few years ago when it became clear that only about one-third of professional money managers are able to beat the market averages. As a result, many managers decided to give up and put their money into index funds - funds that simply mirror what happens in the overall market. This dull, if no-hassle approach to investing has become so po- pular that $15.8 billion of investors' money is now being "managed" in index funds, according to Lipper Analytical Services Inc. One key advantage of the index fund is its low cost. Because the funds are intended to replicate the movements of a market index, there's no fancy stock-picking needed and little trading re- quired. One typical index fund is patterned after the Standard & Poor's 500, a collection of blue-chip stocks. The performance of the S&P 500 index is the yardstick against which Wall Street often measures the ability of investment managers. Indeed, the S&P 500 is the "market" from which Vanguard's Index Trust has created a new growth portfolio with 180 stocks and a new value portfolio with 320 stocks. The market capitalization of the companies in the S&P index - the number of shares times the share price - totals $2.9 trillion. The growth and value port- folios each have half of the market capitalization. Vanguard drew the line between growth and value by using the re- lationship between a company's stock price and its book value. (Book value is a company's assets minus any liabilities.) Com- panies with the highest stock prices relative to their book value went into the growth category. Companies with lower stock prices relative to book value went into the value category. The top growth stocks were Philip Morris Cos., Wal-Mart Stores Inc. and General Electric Co., while the top value stocks were Exxon Corp., Royal Dutch Petroleum Co. and International Business Machines Corp. George U. Sauter, manager of Vanguard's equity index portfolios, said that the design of the new portfolios would allow sharehold- ers to "tailor their investments to their own personal cir- cumstances." An investor in his or her retirement years, for instance, might prefer the value portfolio, which would have a higher dividend yield - about 3.7 percent, compared to 2.2 percent for the growth category. In the value category, the lower share prices and higher dividend yields also would provide the older investor with protection in a falling market. On the other hand, Sauter said, the growth category might be suitable for a younger shareholder willing to accept more vola- tility to achieve long-term gains. In the growth sector, the investor also would receive fewer dividends on which to pay taxes each year. Dreyfus and Wilshire, in their joint effort, selected their stocks from a different universe than Vanguard. Wilshire chose about 800 stocks for four portfolios: large and small company growth stocks, and large and small company value stocks. All are part of the Wilshire 5000 index. David R. Borger, director of research at Wilshire, said his com- pany identified growth stocks by looking for high historic rates of earnings, high returns on a company's equity and low dividend payout rates. Value stocks were screened for low price-to- earnings ratios, low price-to-book ratios and high dividend yields. "We want to give the retail investor an opportunity to participate in very focused investment funds, where there's never any worry about cash levels and never any worry about divergences in style," Borger said. Unlike other funds, these are immediately investing the cash they receive, Borger said. Vanguard (1-800-241-6999) offers its growth and value portfolios without sales charges or redemption fees but charges an annual $10 account fee. Total operating ex- penses are a whisker-thin 0.20 percent. The initial investment is $3,000, or $500 for retirement accounts. The Dreyfus-Wilshire (800-782-6620) team offers its four growth and value portfolios without upfront sales charges but levies a 1 percent redemption fee on shares sold within six months. Total operating expenses are listed as 0.65 percent, with Dreyfus ab- sorbing 0.10 percent until the end of the year. Minimum invest- ment is $2,500, or $750 for retirement accounts. If the Vanguard and the Dreyfus-Wilshire portfolios, which opened just recently, had been available for the past decade, how would they have performed? Vanguard figures show that its value and growth portfolios would have tracked the S&P 500 index closely over one-, five- and 10- year periods. At Wilshire, the large value and growth funds would both have done slightly better than the S&P 500. A small value fund would have done markedly better than the S&P, while a small growth portfolio would have done much worse than the S&P during those time frames. Too often in the past, investors have been offered the right funds at the wrong time. Investors who like the growth and value concepts have to hope this isn't one of those times. The 1980s, of course, were marked by rapidly rising stock prices, even considering the 1987 market crash. However, many observers believe the salad days are gone and investors will see smaller gains from stocks and financial investments for several years. The new growth and value portfolios come complete with all the normal risks of the stock market. That means that investors who use the portfolios must build in time to recover from an extended market downturn - something we haven't seen for a while. 02:11 11-18C9999----- Copyright 1992, The Washington Post. This story is from the Washington Post's Capitol Edition On-Line and is not to be ar- chived or redistributed. For more information, send-email to American Cybercasting Cor- poration (usa@AmeriCast.COM)