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Index Funds That Go One Step Beyond


Personal Business: Smart Money

INDEX FUNDS THAT GO ONE STEP BEYOND

If you favor investing in growth or value stocks, a new type of mutual fund can accommodate your style. Known as "style" portfolios, they are akin to index funds, which invest in hundreds of stocks at a time, attempting to mimic the performance of their index. But style portfolios carve out a growth or value slice of an index.

Vanguard Index Trust divides the Standard & Poor's 500-stock index into two parts: a growth fund, comprising the 195 stocks with the highest prices relative to their book value, and a value portfolio, made up of the remaining 305 stocks, which represent the best buys. Dreyfus has broken down the Wilshire Top 2500-stock index into the Dreyfus-Wilshire Target Funds, including large-company growth, large-company value, small-company growth, and small-company value portfolios. The fund adviser screens out "wishy-washy" stocks that don't clearly fit the style, says David Borger, director of research for Wilshire Asset Management.

OLDER IS WISER. Style funds are a passive alternative to seeking out the best growth or value managers. The funds have a more rigid style orientation than actively managed mutual funds. Most fund managers keep part of their portfolio in cash, as well as in stocks that don't strictly match the fund's style profile. This year, value investing has provided handsome gains, and value-index funds have trounced their diluted actively managed peers. But managed-growth funds have outperformed growth style funds because the latter were more exposed to stocks that did poorly.

Returns for regular stock market index funds were about 4.7% for the first half of 1993, falling midway between value and growth style funds. Launched late last year, style funds have low turnover, so you pay less capital-gains tax. Vanguard charges 0.2% a year in expenses; Dreyfus is waiving all fees.

The market moves between favoring growth or value, high-cap or low-cap stocks. Knowing this, "there are a lot of very interesting investment programs you can set up using these as tools," says Don Phillips, publisher of Morningstar Mutual Funds. You could put money in each style offering or select one fund to fill a hole in a portfolio. But advisers warn against buying the fund in favor and selling it when the market changes course.

Some advisers are wary of index funds. "If you want to do better, buy good quality managers," says Robert Glovsky, a Boston financial planner. He recommends funds that are at least three years old. Still, for people who want to avoid the whims of active management, the new funds offer a low-cost way to invest with style. INVESTING WITH STYLE

Fund 1993 total Managed funds

return* average

VANGUARD INDEX TRUST

Large company value 12.17% 6.83%

Large company growth -2.63 -0.17

DREYFUS/WILSHIRE TARGET PORTFOLIO

Small company value 6.97 5.57

Small company growth 3.24 5.21

*THROUGH 6/30 DATA: MORNINGSTAR INC.

Amey Stone


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