EVERY MANAGER is different, but there are three broad archetypes when it comes to investment strategy: growth, value and blend. The issue here is whether the manager a. is willing to chase popular (a.k.a. expensive) stocks, hoping to cash in on their momentum; or b. is seeking to "discover" cheap stocks, betting that the market will discover them, too.
Growth Funds
As their name implies, these funds tend to look for the fastest-growing companies on the market.
Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation.
For example, Dell and Microsoft are generally considered "expensive" stocks, because their prices have been bid high relative to their profits. But because they enjoy vibrant markets and have rapid earnings growth, managers like Scott Schoelzel of Janus Twenty have no qualms paying big prices.
Schoelzel knows that investors crave these super-charged growth stocks and will keep piling into them
as long as the growth keeps up. But if the growth slows, watch out -- the more momentum a stock
has, the harder it is likely to fall when the news turns bad.
That's why growth funds are the most volatile of the three investment styles. It's also why expenses
and turnover (which leads to tax liability) are also higher. For these reasons, only aggressive investors,
or those with enough time to make up for short-term market losses, should buy these spooky funds.
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Value Funds
These funds like to invest in companies that the market has overlooked. Managers like Marty Whitman
of Third Avenue Value search for stocks that have become "undervalued" -- or priced low relative to their
earnings potential.
Sometimes a stock has run into a short-term problem that will eventually be fixed and forgotten. Or
maybe the company is too small or obscure to attract much notice. In any event, the manager makes
a judgment that there's more potential there than the market has recognized. His bet is that the price
will rise as others come around to the same conclusion.
Whitman, for instance, bought real-estate insurance company First American Financial early in 1997
before it was discovered by the Street. The stock rose 96% in 1998 and still traded at just 9.5 times
the past 12-month earnings -- a steal when you consider the market average at the time was more like
22 times earnings.
The big risk with value funds is that the "undiscovered gems" they try to spot sometimes remain
undiscovered. That can depress results for extended periods of time. Volatility, however, is quite low, and
if you choose a good fund, the risk of doggy returns should be minimal. Also, because these fund
managers tend to buy stocks and hold them until they turn around, expenses and turnover are low. Add
it up, and value funds are most suitable for more conservative, tax-averse investors.
Blend Funds
These can go across the board. They might, for instance, invest in both high-growth Internet stocks and
cheaply priced automotive companies. As such, they are difficult to classify in terms of risk. The
Vanguard 500 Index fund invests in every company in the S&P 500 and could therefore qualify as a
blend. But because it's also a large-cap fund, it tends to be steady. The Legg Mason Special
Investment fund is more aggressive, with heavy weightings in technology and financials. In order to
determine if a particular blend fund is right for your needs, you'll probably have to look at the fund's
holdings and make a call.