Market upheavals can quickly swing industries from growth to value and back again -- and knock your portfolio off balance. By Russel Kinnel, Contributing Editor August 6, 2010 Smart fund investors balance growth and value in their portfolios. The two flavors often rally and retrench at different times, so holding both smoothes a portfolio's ups and downs. But upheavals in the markets and the economy mean whole industries can quickly swing from growth to value, or from value to growth. And some get stuck in between the two, which puts them into what we at Morningstar call the blend category. When that happens, you need to evaluate your portfolio to make sure it hasn't become too weighted to growth or value, or too concentrated in just a few industries.Some industries are easy to assign to a category. The financial industry is in the value camp (more so since the sector collapsed in 2008), and biotech is clearly on the growth side. But what about energy and the rest of health care? The lines have blurred in those and other sectors. Bear markets often single out one or two sectors and lay waste to them. Financial stocks felt the brunt of the bear during the 2007-09 disaster. During the 2000-02 downturn, technology stocks took the harshest beating. Technology used to be considered the prototypical growth sector. But many tech stocks have been down so long that they're now being purchased by value investors. Style switch. Not only does market turmoil make it hard to strike a good growth-value balance, but some funds, including some of the very best, change their stylistic stripes from time to time. For instance, Fairholme Fund (symbol FAIRX), a member of the Kiplinger 25, recently went from holding mostly growth stocks to holding mainly value stocks, and from owning stocks of large companies to owning stocks of smaller ones. The change reflects manager Bruce Berkowitz's shift from energy and drug stocks to financial firms (now 51% of his portfolio). Advertisement Fairholme has indeed changed its style, according to the way Morningstar determines such things. (Figuring the size of a fund's holdings is straightforward. Categorizing a fund's holdings on the value-growth spectrum takes far more work. We score holdings using ten fundamental measures, including price-earnings ratio, dividend yield, historical earnings growth and projected earnings growth.) But Berkowitz hasn't really changed his strategy: He has always looked for companies trading at a steep discount to their intrinsic value. Still, as a Fairholme shareholder, I plan to study my overall portfolio to make sure I'm not betting the house on financials. While Fairholme was gravitating to value, Royce Special Equity Investment (RYSEX) was drifting toward growth, even though manager Charlie Dreifus hadn't made major changes to the portfolio. That's because Dreifus is a stickler for clean accounting and healthy balance sheets, and investors have been valuing companies with those sorts of attributes more highly since the recession began a few years ago. In other words, Special's holdings sport higher P/Es than they once did, helping push the fund into growth-style territory. Because the fund's sector weightings haven't changed much, I wouldn't be too concerned about the move. Of course, you can protect your portfolio from overlapping holdings by investing entirely in index funds or by sticking with actively managed funds that come with strict limitations. But then you're missing the chance to buy funds with great managers whose strategies are flexible enough to allow them to strut their stuff in different kinds of investing environments. So, especially in these turbulent times, periodically review your portfolio to see whether it has drifted too far in one direction. Be sure you own both value and growth funds, and funds that invest in small and large caps. When the inevitable ups and downs occur, you'll be satisfied that you have all the bases covered. Columnist Russel Kinnel is director of mutual fund research for Morningstar and editor of its monthly FundInvestor newsletter.