Legg Mason Inc. launched a new value fund yesterday, saying the time is ripe for an investment style based on buying stocks that have temporarily fallen out of favor.
The Legg Mason Classic Valuation Fund is managed by a team led by Tony Hitschler, chief investment officer of Brandywine Asset Management Inc., and Alec Cutler, Brandywine's managing director. Brandywine is a subsidiary of Baltimore-based Legg Mason.
"Traditional value has been out of favor for about four years, and the market tends to move in style cycles," said Cutler. "We've basically been in a growth style for several years."
Value stocks are those that, for whatever reason, have had a temporary setback and have lost their luster on Wall Street. Value investors buy these stocks, hoping to ride the wave when the companies or their industries recover. Growth stocks have a track record of higher-than-expected earnings.
The Classic Valuation Fund's goal is to find high-quality companies whose prices are low in relation to their earnings. Turnover in the portfolio should average less than 40 percent a year, Legg Mason said. About 800 stocks have met the fund's criteria of cheap and out-of-favor, Cutler said. Among those, the managers targeted 70 to 90 companies whose stocks are "miscast" by the market, he said.
Companies the fund managers like include Seagate Technology Inc., a disk-drive maker whose industry is suffering from oversupply; and BCE Inc., which controls 70 percent to 75 percent of the telephone market share in Canada and has been hurt by deregulation there. The managers also have high hopes for Philips Electronics, maker of consumer electronics and other products.
"We believe we are going into a 10-year consumer electronics renaissance," said Cutler, anticipating the trend toward flat panel television sets, digital TVs and digital versatile disks. The question is whether value funds are headed for a renaissance.
Investors for years have leaned toward growth funds and have been rewarded with higher returns. As of the end of October, growth funds this year have returned 19.44 percent vs. 2.13 percent for value funds, according to Morningstar, which tracks mutual funds. Over 10 years, the average annual return is 15.98 percent for growth funds and 13.05 percent for value.
And money continues to flow into growth funds. For the first nine months of this year, investors poured $74 billion into large-cap growth-oriented funds and pulled $14 billion out of large-cap value-oriented funds, according to Strategic Insight, a mutual fund research firm in New York.
But Cutler maintains that over the long term, 30 years to 40 years, value stocks have outperformed the market and growth stocks.
"Academics say in the long haul, value beats growth, and what's been happening in the last 10 years doesn't change anything," said Russ Kinnel, mutual fund editor for Morningstar.com in Chicago. "For just about any investor's time period, you can't predict which will do better, whether it's foreign or U.S., value or growth. It makes sense for people to have something of everything."
The minimum initial investment in the new fund is $1,000. Legg Mason has 23 funds, with $21 billion under management.