Flight to Value May Be in Order

August 11, 2004 (PLANSPONSOR.com) - With the equity markets struggling during July - giving back an average 4.9% - value funds proved a safer haven for skittish investors during the month than their growth-oriented counterparts.

It’s not that value funds bulled ahead during July, but more a notion that value investors lost less than those holding growth funds, according to an Associated Press report.. Small-cap growth funds suffered the worst, plunging 8.9% in July, while large-cap value offerings held up the best under the strain, shedding only 2.5%, the S&P data indicated.

Looking on a year-to-date basis, the average equity fund has fallen 1.2% so far this year. But value stocks have enjoyed an edge over other investment styles. While small- and mid-cap value equity funds have been 2004’s leaders so far, cautious investors are gravitating toward less volatile large-cap value funds, where the effects of dividends may offset the bruising many believe is still to come.

Even with the much less than stellar equity performance, some financial advisors and investing experts argue that it would be a mistake to sell equity funds now. Leaning toward value funds could well prove a safe tactic in the coming months.


“Value stocks have a higher dividend payout, less volatility and a lower valuation,” Sam Stovall, S&P’s chief investment strategist, told the Associated Press. “So, they’re cheaper, they pay you more and they wiggle less. If you can rotate, if you have the ability in your retirement account, in your 401(k), to embrace higher dividend-paying, higher-quality stocks, then now might be the time to be doing that.”

Large-cap value funds may not be the most exciting investment, but their returns are steady — actually equal to growth over the very long haul. And their dividend yields can be an important source of income in down markets.