This is a changing market. Not only has the S&P 500 Index been dethroned as the sure route to high returns and wealth, but value stocks are starting to beat growth stocks.

Yes, you read that right. Value--- the sector of the market that was beaten and left for dead--- has started to turn in better numbers than growth.

The evidence can be found in the fund group averages tracked by Lipper Analytical Services. As of last week, value funds were ahead of growth funds whether you were investing in funds that specialized in large, mid, or small capitalization stocks. The figures are shown below.
Value Starts Pulling Ahead of Growth (Year-to-Date performance)
Capitalization Category Growth Value
Large 0.80 percent 2.09 percent
Mid 7.49 9.92
Small 11.91 14.21
Source: Lipper Analytical Services, Friday September 15 close data
If this is a surprise to you, don't feel badly. For nearly three years, growth stocks have been the only place to be. They've also been the only thing we've heard about, whether the media barrage was coming from television, glossy magazines, or newspapers. In 1998, the average large cap growth fund, according to the Morningstar database, provided a return of 33.58 percent while the average large cap value fund returned 'only' 13.14 percent. In 1999 the performance gap was even greater, with large growth funds returning a whopping 39.96 percent while value funds returned a dismal 6.77 percent.

When you measure the performance gap in dollars, the figures are stunning. A $10,000 investment in the average large cap growth fund at the beginning of 1998 would have grown to $18,700 by the beginning of this year while the same investment in the average large cap value fund would have grown to only $12,100. The $6,600 difference--- in only two years--- is the kind of thing that makes money fly out of the disappointing funds and rush toward 'where the action is.'

Small wonder that many value funds have less money under management today than they had two or three years ago. As noted in previous columns, during much of the last year value oriented funds have been in net redemption, along with bond funds and balanced funds.

Yes, I said net redemption--- more people were taking money out than were putting money in. Vanguard Windsor II, a value oriented fund used in many 401k plans and managed by Barrow, Hanley, Mewhinnehy, and Strauss in Dallas is a prime example of this capital flight. At the end of 1998 the fund had $31.5 billion in assets. But a loss of 5.8 percent in 1999 sent investors running for the exits. Assets under management plunged to $22.4 billion.

While assets under management at Windsor II may have dropped more dramatically than at most other large cap value funds, it remains that most funds in this group saw their assets peak in 1998.

And therein lies an interesting possibility.

While analysts and academics can argue about whether large or small, growth or value, or the best long-term investments, one of the most powerful forces in the market is the month-to-month flow of money. Change the direction of the flow and the assets getting the new money can rise, or sink, in value very quickly.

Large capitalization stocks, by definition, are about 85 percent of total market value in America. Shift a small percentage of the money in large cap to small cap and price changes can be very large. A similar, but less dramatic, relationship exists for growth versus value. There are, according to a recent Leuthold Group study, $889 billion in growth fund assets compared to $649 billion in value fund assets. Again, any shift from one could have an impact on the other.

Money is definitely starting to move from large to small and it appears to be moving from growth to value.

Both are fundamental changes that remind me of an old truism.

"Follow the money."