Growth Led Value Stock Funds For Solid Gains In Volatile Month

Most major stock indexes surpassed their mid-July peaks as the market recovered from a 12% peak-to-trough correction in summer.

Average Stock Fund Advanced

Amid this diverse stimuli, the average diversified stock fund rose 2.34% in October after a 3.53% gain in September, according to Lipper Inc. It ended the month ahead 12.3% for the year.

The Dow ticked up 0.25% in October and was up 11.77% year to date. The S&P 500 edged up 1.48% on the month and was up 9.24% for the year. Both hit a record high Oct. 11.

The tech-heavy Nasdaq composite trumped both indexes. It rose 5.83% for the month and 18.38% for the year. But it still has a long way before seeing its record high from the tech bubble.

Growth trumped value again for the fifth month in a row.

Large-cap growth funds rose 4.04% in October and 18.81% year to date. Large-cap value funds lagged, with a gain of 0.77% for the month and 8.02% year to date.

The 25 largest mutual funds, with $35.5 billion to $94.4 billion in assets, posted year-to-date returns ranging from 5.6% to 24.6%.

Mid-cap growth climbed 3.8% in October. It leads all domestic size and style categories year to date with a 22.2% return. Mid-cap value edged up 0.97% for the month and 8.47% year to date.

Small-cap growth funds rose 4.13% last month. They're ahead 16.85% for the year. Small-cap value picked up 1.08% last month and just 2.23% for the year.

Mutual fund managers are still bullish on larger caps and favor growth stocks over value. Even after soaring to new highs, the market still has more upside potential, several said.

Craig Hodges, president of Hodges Capital Management and head of the $756 million Hodges Fund (NASDAQ: - ), said the market is still undervalued.

"The S&P is trading at 18 times trailing earnings. Historically that's a pretty low number," Hodges said. "Plus with the weak dollar, foreigners can buy our goods cheaper. That's going to create some demand, too. With the record cash on balance sheets and the record company buybacks, the market is still going to do well."

Partners at Lord Abbett expect the economy to grow at an annual rate of 3% in the second half of this year. In a Q3 market report, the firm said it sees moderate growth in consumer and capital spending pulling the economy along.

"Inflation will not likely accelerate," the firm's partners said. "These expectations should provide investors with the potential for positive returns in the second half of 2007."

But a recession is more likely to happen than not, Charles Schwab's chief investment strategist told an auditorium full of investment advisers at an industry conference in Las Vegas last week. But that doesn't mean trouble for the stock market is at hand.

"What is unique about this environment is that five years into the bull market, the market is cheaper now than when the bull market started and that's unprecedented," Liz Ann Sonders said. "The appreciation in earnings growth has gone well beyond the appreciation in stock prices."

The burst of the Internet bubble in 2000 made way for the last recession. The stock market raised red flags about the health of the economy. But the stock market isn't the economy's soothsayer this time around, Sonders said.

"This economic slowdown is more concentrated in the credit markets," she said. "And the credit markets are more of a proxy of what ails the economy right now, whereas the stock market is less so."

Top-Performing Funds

Among nearly 800 large-cap growth funds tracked by Lipper, Janus Adviser Forty (NASDAQ: - ) led its peers with gains of 38% for the year, an average annual 25% for the past three years and an average 13.5% for the past 10 years.

Its $4.4 billion in assets are concentrated among 20 to 40 names. As of Aug. 31, its top positions were Google (NasdaqGS: - ), Las Vegas Sands (NYSE: - ), Potash Corp. of Saskatchewan (NYSE: - ) and Research In Motion (NasdaqGS: - ).

Of 644 mid-cap growth funds tracked by Lipper, CGM Focus (NASDAQ: - ) topped the heap for all time periods. The $4.4 billion fund vaulted 77.6% year to date and cranked out an average annual 40% the past three years and 24.8% the past 10 years.

Manager Ken Heebner had assets spread over 22 long and four short positions as of the latest report. It also had Potash as a top holding, in addition to Vimpel Communications (NYSE: - ), Schlumberger (NYSE: - ), Companhia Vale Do Rio Doce (NYSE: - ).

Lord Abbett Developing Growth Fund (NASDAQ: - ) outpaced its small-cap category this year by a wide swath with a 41.2% return.

It also is the top performer over two years, up an average annual 30%. Recent top holdings are Strayer Education (NasdaqGS: - ), Synaptics (NasdaqGS: - ) and Onyx Pharmaceuticals (NasdaqGM: - ). Their gains this year range from 75% to 366%.

TCM Small Cap Growth (NASDAQ: - ) led the past three years. It's returned an average annual 25%. The fund buys industry leaders in growth sectors.