(October 3) – “Bargain hunting is again proving to be a winning strategy for stock mutual funds,” writes Aaron Lucchetti in today’s Wall Street Journal.

“Portfolios focusing on value stocks that look cheap relative to their earnings, revenue and other measures enjoyed a distinct performance edge during the third quarter, according to preliminary figures released by Lipper Inc.”

” ‘Value is doing well, just like it did during the last quarter,’ said Edward Rosenbaum, Lipper’s director of research, referring to the April-June period. Many companies classified as value plays are sensitive to the upturns in the economy, and the strong growth in the U.S. economy during 2000 has helped them boost their businesses, Mr. Rosenbaum says.”

“In addition, earnings shortfalls and concerns about growth in the faster-growing segments of the market are making value investing look better by comparison, he says. ‘Value returns are finally getting noticed’ after being snubbed for years for the double- and triple-digit gains in the growth area, according to Mr. Rosenbaum.”

“Here is how the value-growth dichotomy shaped up. In the large-stock sector, value funds returned an average of 3.34% during the July-September period, ahead of the slightly negative returns of the large-cap growth funds and Lipper’s “large-cap core” fund category.

For funds holding smaller stocks, the return gap was also noticeable. Midcap value funds returned an average of 6.74% compared with the midcap growth returns of 3.18%, and small-cap value funds returned 6.54% for quarter, as small-cap growth funds — the darlings of the 1999 and early 2000 market — returned a modest 0.35%.”

“Financial-services stocks, boosted by consolidation among banks and brokerage firms and the belief that interest-rate increases could be over for the time being, helped both value-oriented funds and those that specialize in the financial-services sector. Several of the market’s best-performing funds of the third quarter specialized in financial stocks, including Fidelity Select Insurance Portfolio, Icon Financial Services Fund, Prudential Financial Services Fund, FBR Financial Services Fund, PaineWebber Financial Services Growth Fund, T. Rowe Price Financial Services Fund and John Hancock Financial Industries Fund. All those funds and several others returned more than 20% for the quarter.”

“Among the value portfolios helped by financial stocks’ rebound was Washington Mutual Investors Fund, a $46 billion fund that had 23% of its assets in financial stocks as of June, according to Morningstar Inc.”

“Other value-oriented funds that excelled during the quarter included Vanguard Windsor II Fund, which rose 10.5% for the quarter, according to preliminary Lipper numbers, and 9.83% for the year through September.”