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Fund Spy

The Only Investment Style You'll Ever Need?

One investment style has had a clear edge over time.

Casting your net in the fishiest waters gives an edge in fishing. The same is true in investing. The ability to slice and dice data using hundreds of specialized statistics can cause us to lose sight of the fact that the underlying goal for most investors remains very straightforward: compound capital at the highest possible rate over time. Beating the overall market over time is a common goal for many funds and investors. We looked at the performance of broad investment styles over time to see if a particular style had done a better job at helping investors meet this goal. A clear pattern emerged.

Top Fishing Hole
Here's what we did. We compared the performance of all domestic-equity share classes with the Dow Jones Wilshire 5000 Index for the trailing 15-year period through Sept. 30, 2007. We chose this index because, unlike the large-cap-leaning S&P 500 Index, it covers the full market-cap spectrum. This stretch of time also represents more than a full market cycle, encompassing the last bear market from 2000 through 2002 and the fantastic bull-run from 1995 through 1999. And it contains enough funds to make meaningful comparisons. We then placed funds into value, blend, and growth groups based on their investment style. Where possible, specialty categories were placed according to style. For example, specialty technology and communications funds landed in the growth camp, while utilities and financials ended up in the value group. Some specialty categories were tough to pigeonhole, so they were not assigned a subgroup.

As the table below shows, one style stood out from the pack. Ibbotson Associates has shown that value stocks have outperformed other styles by a wide margin since 1927. And they've done so consistently, beating all other styles in nearly every decade over the past 80 years. But because of active management and fees, stock performance doesn't always translate into fund performance. In this case it does. More than 70% of value funds topped the Dow Jones Wilshire 5000 in the trailing 10- and 15-year periods. That's a much better record than domestic-equity funds in general, and growth and blend funds in particular.