To grasp value, growth, learn criteria of pros


As you seek advice for adding an equity fund to your portfolio, you keep reading that "value funds" have been outperforming "growth funds" in the last year.

What, you ask, are value funds, anyway? What kind of stocks do they invest in? How can you find a suitable value fund?

Value funds invest in stocks that sell for less than the value per share of company assets. They contrast with growth stocks, companies whose earnings are showing solid growth.

The definitions are correct, but insufficient. Since growth stock investors are unlikely to load up on stocks that sell for more than the values of underlying assets and value stock investors are unlikely to chase stocks of companies whose earnings are falling, they don't really delineate differences between the two.

To understand the differences between value and growth stocks -- and the funds that invest in them -- you should acquaint yourself with criteria that portfolio managers use when they screen the 6,000 or so stocks available today:

* Price-book ratio. The ratio of share prices to the issuing companies' book values per share are likely to be low for value stocks but high for growth stocks.

* Price-earnings (P/E) ratio. Prices of value stocks are likely to be a low multiple of their earnings per share, while growth stocks are likely to have high P/E ratios.

* Earnings growth. Earnings per share of growth stocks tend to increase at faster rates than those of value stocks. (That's why growth stocks' dividends tend to grow faster, too.)

* Dividend yield. Dividends paid on value stocks are likely to be a higher percentage of their market prices than those paid on growth stocks. Some growth stocks pay no dividends at all.

To provide money managers and investors with benchmarks for comparing the performance of growth- or value-oriented stock portfolios or equity funds, leading investment data firms have developed growth and value stock indexes.

With BARRA, an investment technology and consulting company, Standard & Poor's divided the 500 stocks constituting the S&P; 500 Index into growth and value stocks to make up the S&P;/BARRA Growth and Value Indexes. The division was based on price-to-book data.

The Value Index consists of 328 companies, whose market capitalization (share price times number of shares outstanding) ranges from the $63 million of Westmoreland Coal to Exxon's roughly $80 billion. The Growth Index consists of 172, whose market "cap" ranges from Interlake's $77 million to GE's $80 billion.

Frank Russell Co. made a similar split of the companies in the Russell 1000 Index, but classified Exxon as a growth stock. With a cap of $85 million, Wang Laboratories is the smallest in the Russell 1000 Growth Index. The Russell 1000 Value Index ranges from General Cable, $55 million, to Du Pont, $35 billion.

No matter which index you look at, value stocks beat growth stocks last year and have continued to outperform them in 1993.

Even though stocks may have reached what Michael Price calls "treacherously high values," he says he continues to spot undervalued se

curities for his four Mutual Series Fund portfolios among groups "that have been clobbered."

Always seeking what co-manager Anthony Kreisel calls "unknown, undiscovered, and misperceived" stocks with impressive earnings power, The Putnam Fund for Growth and Income has been adding to its positions in oil stocks; they now account for four of its top 10 holdings. Also moving up: American Home Products and Philip Morris.

Finding well-managed value funds isn't easy. Not all funds with "value" in their names are (1) well-managed or (2) value funds.

Under the circumstances, you may wish to consider one of the no-load funds related to the Wilshire and S&P;/BARRA indexes. They were introduced last fall by Dreyfus and Vanguard, respectively.

The Dreyfus-Wilshire Target Funds' Large and Small Company Growth and Value portfolios only try to parallel the respective indexes -- not to match them -- while the Vanguard Growth and Value portfolios seek to match the performance of their indexes.



How stock indexes and mutual funds that try to follow them have performed this year

Stock indexes.. .. .. .. .. ..Value (a).. .. .. .. ..Growth (a)

S&P500;/BARRA.. .. .. .. .. .. .8.80%.. .. .. .. .. .. ..5.08%

Russell 1000.. .. .. .. .. .. .8.26%.. .. .. .. .. .. ..4.80%

Wilshire Large Company.. .. ...7.04%.. .. ... .. .. .. .6.81%

Wilshire Small Company.. .. .. 6.38%.. .. .. .. .. .. ..2.41%

Lipper 30-Fund.. .. .. .. .. ..4.77%.. .. .. .. .. .. ..4.03%

Stock index-linked funds

.. .. .. .. .. .. .. .. .. .. ..Value.. .. .. .. .. .. .Growth

.. .. .. .. .. .. .. ... .. ..portfolio (b).. .. ..portfolio (b)

Vanguard/S&P; (NL).. .. .. .. .. .8.54%.. .. .. .. .. .. .5.09%

Dreyfus-Wilshire Large Co. (NL c)5.99%.. .. .. .. .. .. .6.32%

Dreyfus-Wilshire Small Co. (NL c)5.77%.. .. .. .. .. .. .0.00%

(a) Total returns through April 30.

(b) Total returns through May 13.

(c) 1% fee for redemptions within six months, to be retained by funds.NL No load.

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