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December 19, 2001
Value Funds Enhance Their Value
    by William Baue

Valuation-oriented social funds perform well amidst mixed financial markets after the exuberance of the last two years.


Social funds with a value-investing strategy are showing impressive returns over the last year. Value funds focusing on small-, mid-, and large-cap companies are sharing in this success. All figures quoted in this article are current as of November 30, 2001.

Value funds seek to capitalize on mature, seasoned businesses that are undervalued by the market, and therefore show promise of significantly increasing their share price. Tim Fidler, vice president of research and assistant portfolio manager for Ariel Mutual Funds, explained why value funds are performing so well as of late:

"We're still going through the tail-end of some of the craziness that hit the market in '99 and 2000. Clearly you had a lot of money sloshing around, and importantly you had businesses spending a lot of capital that was unsustainable," Mr. Fidler said. "So once the music stopped with respect to that macroeconomic phenomenon, I think people had a really hard time trying to figure out where the normalized earnings power of a lot of these companies were."

Mr. Fidler explained how Ariel capitalized on this trend. "We were able to pick off some very good companies that got sold at firesale prices because of this phenomenon." For example, Ariel bought stock in the Interpublic Group of Companies (ticker: IPG), considered a leader in advertising over the past decade. "Once the comps started getting tough and the economy started slowing, people way oversold that name in particular, and the stock was down over 50 percent. But I can assure you that the company's fundamentals were not impaired to that degree."

Ariel's top holdings include MBIA (MBI), CenturyTel (CTL), Lee Enterprises (LEE), Hasbro (HAS), and Cendant (CD). Ariel manages two value funds that performed well recently, as well as over the long haul. The Ariel Appreciation fund (CAAPX) invests in mid-cap companies. Its one-year return rate of 17.96 percent placed it in the ninth percentile ranking compared to all mid-cap funds, according to information provided by Weisenberger. A ninth percentile ranking means it outperformed 91 percent of its peers. Over five years, it outperformed 94 percent of its peers, earning a return of 16.97 percent.

The Ariel Fund (ARGFX), which invests in small cap companies, also fared well. Over the one-year period, it earned a return rate of 17.96 percent. Over the five-year period, it outranked 91 percent of its competitors in this category with a return rate of 15.42 percent.

Other value funds that performed well include the Citizens Value Fund (MYPVX--formerly the Meyers Pride Value fund), which invests in companies of all sizes, from small- to mid- to large-cap. With a one-year return rate of 17.84 percent, it outranked 97 percent of its competing mutual funds. Over the five-year period, it ranked in the fifth percentile.

Another top-performer in the value fund category is the Parnassus Fund (PARNX), which invests in both small- and mid-cap companies. Its three-year return rate of 22.17 percent placed it in the first percentile ranking. Over the five-year period, it outranked 96 percent of its competitors, yielding a return rate of 16.43 percent.

The Neuberger Berman Socially Responsive fund (NBSRX) is edging its way into contention, ranking in the thirteenth percentile over the one-year period. The fund invests in mid- to large-cap companies based on a bottom-up strategy, choosing its investments not by industry but by the underlying fundamentals as well as statistical cheapness of individual companies. Neuberger Berman Associate Portfolio Manager Ingrid S. Dyott accounts for this fund's recent success:

"What's paying off over the short term is being valuation sensitive and focusing on well-run companies that are selling at a discount to either their peers or what we deem the company should get in the market," she said. The fund's top holdings include Dell Computer Corporation (DELL), Progressive (PGR), and Citigroup (C).

"We believe that doing well and doing good are not mutually exclusive," Ms. Dyott concluded.

 

 
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