At last, some value in Dow's record rise

Something different took place behind last week's push of the Dow Jones Industrial Average past 11000.

Investors' attitudes shifted.

Most of the action since the Dow left 7000 in the dust has focused on what market insiders call the generals - the big, growth companies that in recent years have lead the market higher.

The only problem has been that the rest of the market - the soldiers - have failed to keep pace.

But now there are signs that smaller, value-oriented companies - those whose earnings and prospects have been overlooked - are catching up.

The evidence shows up most clearly in mutual funds such as Pioneer II, part of the Pioneer Investment Management family in Boston.

The fund focuses on value companies, and for the first quarter of 1999, when a rush of new records flooded the Dow, it was under water - down 3.5 percent and off almost 20 percent for the year through March 31.

But last month, the stock market started to broaden and come to the rescue of fund managers such as Pioneer II's Richard Dahlberg.

Value companies started to gain ground, and Pioneer II pushed ahead by 6.3 percent in April. And when the Dow pulled back from its historic 11000 level, Pioneer II shares lost less ground.

Mr. Dahlberg, who took over management of Pioneer II last September, calls the long-favored large corporations and high technology companies the "nifty few." He's playing on a phrase, the "nifty fifty," that referred to popular blue-chip stocks in the early 1970s.

In 1998, for example, companies with total stocks worth more than $20 billion saw their shares gain 26 percent in value. Mutual funds investing in such "growth stocks" have performed extraordinarily well.

But stocks with market capitalization of below $250 million lost 24 percent in value last year.

Shareholders of Pioneer II and some other value funds have been bailing out. Pioneer II's total assets under management of $6.3 billion at the end of 1998 sank to $5.6 billion by March 31.

Value funds - those trying to pick stock bargains by looking at fundamentals, such as, say, a low ratio of stock price to earnings - have been hit by what Dahlberg calls a "100-year storm."

In April, though the Dow with its 30 Blue Chip stocks rose handsomely. Stocks whose prices tend to rise and fall with the business cycle did well too. These cyclical stocks are among the long-ignored stocks that value funds tend to select.

Of the top 10 performing stocks in April within the Standard & Poor's 500 stock index, only two were technology stocks, notes David Blitzer, chief economist in New York of S&P. These were IBM (ranked 2) and Lucent Technologies (ranked 6).

The best performer was Exxon, benefiting from the rise in oil prices. Other top performers were Citigroup, Coca-Cola, Royal Dutch, and Dupont. The price of Alcoa's stock rose 50 percent.

"Aluminum companies aren't supposed to go up 50 percent in a month," jokes Mr. Blitzer.

The darling of investors for years, Microsoft, was at the "bottom of the heap." It performed more poorly than the 499 other S&P stocks.

Blitzer suspects the shift by investors into cyclicals and other potential value stocks will continue.

"Reports of the death of value investing are a bit premature," he says.

The new trend indicates the bull market "is more powerful than we thought," Blitzer adds. "The overall market has taken the change in leadership in stride with little difficulty."

Dahlberg says that if value funds continue giving "a good account" of themselves, they will attract investors again. "But it will be a while," he says.

Academic research indicates that in the really long run, value investors do well. But over the past 15 years, Blitzer notes, growth stocks have beaten value stocks.

Dahlberg warns that relying exclusively on the biggest stocks introduces "an unnecessary element of risk to an investment portfolio."

He cites a study that, in effect, supports investment in a value fund like his with an average price-to-earnings ratio of 20. That is modest compared to some growth funds full of stocks with P/E ratios in the 55-to-60 range. The P/E ratio for the Dow is 25.

Salomon Smith Barney, a New York investment firm, found that in the five years after each of the 10 worst bear markets on record, small-cap stocks outperformed their large-cap counterparts by no less than 25 percentage points a year.