Style conscious

In the late ‘90s institutional blend mutual funds, which hold a mix of value and growth stocks, prospered by purchasing shares in Cisco Systems and Microsoft Corp.; after the Nasdaq composite index cracked, the nimblest among them shifted to value names like Exxon Mobil Corp. and Johnson & Johnson. Managing these portfolios effectively demands an ability to discern coming changes in style. But because of their balanced approach, blend funds usually run a few steps behind the style leaders and a few steps ahead of the laggards. Recent results have been no exception.

The categories of large-, mid- and small-cap blend funds outperformed their growth peers last year but couldn’t keep pace with value investors. In all, institutional blend funds suffered an average 9 percent loss, versus a 17 percent loss for growth funds and a 1.5 percent gain for the same class of value funds. Just 56 of the 333 funds generated a positive return in 2001, according to Morningstar. This year through March 15, blend funds returned 1.71 percent, compared with a 4.35 percent gain for value funds and a 1.59 percent loss for growth funds.

Institutional blend funds posted modest asset shrinkage in 2001. Total assets among the funds in the group decreased 3.9 percent, to $157 billion. Again they found themselves in the middle: The 390 growth funds tracked saw a 15 percent drop in assets, to $70.2 billion, while 278 value funds sported a 9.3 percent gain, to $76.9 billion.

There’s little mystery to last year’s returns. “The closer to value, the better the performance,” says Peter Larson, manager of the Galaxy Small Cap Value Fund, a blend fund that returned 18.9 percent in 2001. A small-capital orientation didn’t hurt either.

All of the top funds in the blend category were tilted toward value, and all focused on small-cap names. DLB Small Company Opportunities Fund gained 30.7 percent, CRM Small Cap Value Fund was up 26.5 percent, and DFA U.S. Micro Cap Portfolio was up 22.8 percent.

For the longer term, flexibility is key. “You have to be willing to go with the flow,” says Owen Burman, portfolio manager at the $29 million Riggs Small Company Stock Fund. “You can’t stick to a style if it’s not in vogue.” Among his more successful stock picks: LTX Corp., a semiconductor company, which he bought in October at $13.90 and sold a month later at $21.25.

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The $487 million Galaxy fund took profits in sectors that had a renaissance last year. Example: restaurant stocks like Ryan’s Family Steak Houses and Applebee’s International. “After the technology bubble broke, people discovered that this group was growing pretty well,” Larson says.

Consumer cyclical stocks boosted the performance of the $215 million Evergreen Small Cap Value Fund, says portfolio manager Jordan Alexander. The fund bought retail names such as AnnTaylor Stores Corp. and Williams-Sonoma in late 2000, amid dismal Christmas sales forecasts and sputtering economic growth.

A few blend funds dabbled in technology. Both the Evergreen Small Cap Value Fund and the Riggs Small Company Stock Fund profited from stakes in Cymer, a company that makes laser equipment for the manufacturing of semiconductors. The stock, which hit $14.15 in September, recently traded at $47. Value investing principles prevailed, says Alexander: “We bought a couple of companies with very strong balance sheets, but they were trading at attractive valuations.”