Updated at: 06/08/2014 1:56 PM
(AP) NEW YORK - NEW YORK (AP) â€” The tortoise is running laps around the hare when it comes to investing in mutual funds.
Investors are embracing stocks, pushing the Standard & Poor's 500 further into record territory. But investors are focusing on mutual funds that buy cheap or underappreciated stocks, ones called value funds. Funds that specialize in more glamorous, high-growth stocks, meanwhile, are still getting the snub.
A net $7.9 billion flowed into domestic value stock funds through April of this year. Over the same time, investors withdrew $8.2 billion from their growth counterparts, according to Morningstar. The bias toward value stock funds began last year. As recently as 2012, investors were pulling out of both growth and value funds, still scarred from the financial crisis.
To be sure, value and growth stock funds aren't the only options available. Broad index funds are even more popular, with many investors choosing to own the entire market. But when investors have opted for actively managed funds, they've clearly gone for value over growth.
Stocks don't declare themselves in one camp or the other, instead they're categorized based on broad guidelines. Value stocks tend to have slower revenue growth than companies like Amazon.com or Netflix, but they also tend to pay dividends and have lower stock prices relative to their earnings. Many also have strong balance sheets. Think of companies that cater to basic needs, like toothbrushes, insurance or electricity.
"Our style of investing tends to do better in an environment when the stock market is going slightly up, sideways or down," says Tom Kolefas, manager of the TIAA-CREF Mid-Cap Value fund (TCMVX). It tends to lag growth stocks when there's "a jack-rabbit market that's very powerful, like last year."
Last year, growth stocks in the Russell 3000 index surged 34.2 percent, including dividends. That topped the 32.7 percent return of value stocks in the index, and it was the fourth time in five years that growth stocks beat value.
Part of the allure was the short supply of companies delivering strong growth in a tepid global recovery. The world's economy grew 3 percent last year, its weakest performance since the recession, according to the International Monetary Fund. That made it tough for most companies to boost their sales significantly.
Amazon.com's revenue rose 22 percent last year, and its stock surged 59 percent. But in March, the Internet retailer's stock fell with other growth stocks as worries mounted that their momentum was slowing.
The shift in performance can be seen in mutual-fund returns: The average large-cap value stock fund has returned 5 percent this year, including dividends. That's more than double the 2.4 percent return of large-cap growth stock funds. The disparity is even sharper for smaller stocks: Mid-cap value stock funds have returned 5.1 percent versus 0.5 percent for mid-cap growth funds.
Some of the factors that managers say are driving interest in value stocks include:
â€” CONCERNS ARE HIGHER ABOUT A MORE EXPENSIVE STOCK MARKET.
Last year's market surge means nearly all stocks are more expensive relative to their earnings than before. The Standard & Poor's 500 index trades at 17 times its earnings per share over the last 12 months, for example. That's up from 13 at the end of 2012 and from 8 in early 2009.
Many managers say the market doesn't yet look frighteningly expensive, but investors are more aware of price-earnings ratios. Value stocks in the Russell 3000 index traded at 17 times their earnings at the end of April. Growth stocks were at 21.
â€” VALUE STOCKS ARE HOME TO DIVIDEND PAYERS.
Value stocks typically steer more of their profits to paying dividends. In contrast, growth stocks often find it best to plow their cash back into the business: Spending money to develop new products or expand their warehouses helps to generate even more growth.
Value stocks in the Russell 3000 had an average dividend yield of 2.3 percent at the end of April, versus 1.6 percent for growth stocks.
Demand for dividend stocks has increased as investors look for alternatives to bonds, which offer relatively low yields. This should be a long-lasting trend, says John Manley, chief equity strategist at Wells Fargo Funds Management. With the Baby Boom generation reaching retirement age, a bigger percentage of the population will be looking for investment income.
One challenge for value investors is that the stock market's surge has made cheap stocks tougher to find. But managers say it's not impossible.
When the market looks too risky, John Osterweis says he sells stocks and bides his time in cash. That's what he did with his $1.2 billion Osterweis fund (OSTFX) in 2008, when half the fund at one point was in cash.
But today, cash makes up just 6 percent of the fund. Osterweis looks for cheap value stocks that he believes will morph into growth stocks, and he says he's still finding opportunities.
(Copyright 2014 by The Associated Press. All Rights Reserved.)