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Among Funds, Value Is in Manager's Eye


Many mutual fund investors, like individual stock pickers, have been thinking a lot more about value lately.

Year-to-date, funds that target value stocks are holding up far better than those that target growth stocks.

For fund investors who may be concerned that their portfolios are too growth-stock heavy--and who are looking for some value-style diversification--the funds that turned up in the accompanying screen may be a place to start your research.

Using Morningstar Inc.'s fund database, we did three separate screens: one for small-capitalization value funds (those favoring smaller value stocks), one for mid-cap value (mid-size value stocks) and one for large-cap value.

For each universe, we asked for funds that met the following criteria:

* Year-to-date and one-year total returns greater than the blue-chip Standard & Poor's 500 index.

* Three-year annualized returns equal to or greater than their peer-category average (which may be less than what the average fund overall has done, including growth funds).

* Manager tenure of at least three years.

* Minimum initial purchase of $3,000 or less, and no sales charge.

* Expense ratio less than or equal to their category average.

* Net assets between $50 million and $1 billion.

What we wanted were proven value-fund managers whose funds might be overlooked.

Here's what the screen turned up: In the small-cap value sector, Royce Total Return; in the mid-cap sector, Dreyfus Midcap Value, Muhlenkamp and UMB Scout Stock; and in the large-cap sector, Alliance Growth & Income, Ameristock, Harris Insight Equity, HighMark Value Momentum, Neuberger Berman Focus, RSI Retirement Value Equity, Salomon Bros. Opportunity and UAM TS&W Equity.

Of course, value, like art, can be in the eye of the beholder, and the managers of these funds interpret value investing in various ways.

Perhaps surprisingly, several of the funds on this list, including the Dreyfus, HighMark and Harris portfolios, recently had significant technology-stock holdings. Not Internet names with lofty prospects and limited records, but generally old-school tech heavyweights such as Intel Corp. (ticker symbol: INTC), IBM Corp. (IBM), Applied Materials Inc. (AMAT) and Hewlett-Packard Co. (HWP).

While many highflying tech stocks still command price-to-earnings ratios of 70 or more, Intel and Applied Materials have P/Es that are far lower.

Some funds on the list, such as the Royce fund, define value more traditionally. If your top stock holding recently was machine-components maker NN Ball & Roller Inc. (NNBR), you're probably more "old value" than "new value."

Several of the funds that made the cut have loaded up on the financial sector, a perennial value favorite, including names such as Citigroup Inc. (C) and Morgan Stanley Dean Witter & Co. (MWD).

Ron Muhlenkamp, who has run the $195-million Muhlenkamp fund since 1988, said this stock market can be a hard read no matter what your investing style.

"Some days the money rotates into value, some days not," he said. "There are all kinds of crosscurrents."

His advice: "At a time like this, just pick the appropriate prices for the stocks you like, and if they come to you, then buy."

While Muhlenkamp has held several financial stocks and gotten a boost year-to-date from tech names such as Applied Materials and Intel, he said he might now sniff for bargains among home builders and auto companies, "which have corrected from fear of a recession that hasn't happened."

In the auto sector, he said Ford Motor (F) and parts maker Superior Industries (SUP), which sell for trailing price-to-earnings ratios of 8 and 10, respectively, may be juicy values.

Among home builders, he cited Centex Corp. (CTX) and Beazer Homes USA Inc. (BZH), with P/Es of 5 and 4. (The average blue-chip P/E, by contrast, is about 25.)

Chuck Royce, co-manager of Royce Total Return, said his fund is "sort of for the chicken investor. These are high-quality stocks that pay dividends, so there's a cushion there, and the volatility is low."

He said he looks for stocks with P/E ratios of 10 or less and annualized earnings growth of 10% to 15%. "If you combine, say, 12% earnings growth with a 3% dividend, you can do pretty well. We hit a lot of singles, not home runs."

The fund has benefited from buying insurance stocks, such as Woodland Hills-based worker's comp specialist Zenith National Insurance Corp. (ZNT), starting last fall, when he said the sector got dramatically underpriced. Zenith is up 16% this year.

"The group is in play now and starting to pick up, but it still has a ways to go," he said.

"We're also beginning to poke around in the retail area," he said, noting that mall-based apparel seller Claire's Stores Inc. (CLE) and Consolidated Stores Corp. (CNS), whose bargain outlets include Pic 'N' Save and Mac Frugal's, are among the discounted names.

"We're probably six months or so early on this one--it might be next year's rally," Royce added. He said more earnings disappointments are bound to hurt the sector near term.

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