For Funds, Staying in Style Isn't What it Used to

"The overlap between growth and value investing has expanded since the technology/telecom bubble has burst," Brorson says. He says investors need to carefully study their portfolios in the current environment where the lines between what represents growth and what constitutes value appear increasingly blurred. Acito agrees, arguing that the overlap is a good reason for investment advisors to rethink how they build balanced portfolios for their clients, and to dig deeply into what drives stock selection at individual funds.

Money managers themselves are well aware of this conundrum. Only a year or two ago, they would have been able to label a stock as either growth or value within seconds. Today, answering that question can be difficult; even impossible. Part of the problem comes from the growing pool of "androgynous" stocks, companies like Citigroup or Pfizer that have characteristics of both growth and value. The investment companies themselves only began to examine the issue in the last few months, and Frank Russell Co. is still planning what likely will be the first comprehensive study to determine the magnitude of this overlap. The answer will be important for investors, all agree.

"Investors need to know they're getting the diversification they're seeking," Brorson says.

Jeff Lindsey, head of large-cap and mid-cap growth equities at State Street Research in Boston, says high growth rates are less believable than they were a year or two years ago, pushing managers into areas that they see as offering trustworthy, if not spectacular growth rates. In some cases, those will be areas that still offer relatively low valuations and continue to attract value investors as well. Lindsey believes the overlap involves only a minority of stocks in a typical portfolio of 100 to 150 stocks.

"It's not surprising that we've got an in-between land of stocks; it's a function of the market which causes times of greater overlap and times of less overlap," he says. "Your definition of growth needs to be relative to the opportunities that are available."

Consultants urge investment advisors to press fund families for information from fund families on whether they have studied the issue of portfolio overlap and androgynous stocks. Some, such as Putnam, have already done so, in reaction to what Jeff Knight, chief investment officer for global asset allocation at the Boston-based investment management firm, calls "a degree of frustration" among money managers about stocks that appear to have migrated from one style into the domain of another.

"Some of our portfolio managers are frustrated because suddenly the names they came to know well and identify with aren't turning up in their universe any more," says Knight.

Now buy-side analysts covering technology stocks, undeniably growth stocks for most of the 1990s, say they're fielding phone calls from value managers instead of growth investors. "We're doing a lot of education with those guys; they don't know the space as well, but all of a sudden it's become value territory," says one Internet analyst. Growth investors are also venturing into new territory. Lindsey is playing cyclical trends, such as energy, and investing in slow-growing consumer products companies that once he would have dismissed as being too stodgy.

"Who knew we'd have so much interest in investing in beer companies?" Lindsey marvels