Investing in 1989 : Fears Aside, Stock Market Gets a Nod

What are the best investments for 1989?

To answer that question, The Times asked five investment experts to decide how they would invest $10,000, in both conservative and risky portfolios. For the conservative portfolio, the experts assumed that $10,000 was all they had to invest, and thus they couldn’t afford to lose any of it. For the risky portfolio, the experts assumed that $10,000 was part of a total $100,000 portfolio, and thus they could afford to take capital losses.

Not surprisingly, the experts disagreed on the outlook for the stock market. But they all agreed that staying away from the market entirely would be a mistake because there are plenty of individual stocks or stock mutual funds that should do well, even if the market as a whole heads down.

Here are their picks:

DONALD J. PHILLIPS

Phillips is editor of Mutual Fund Values, a Chicago investment advisory service that evaluates performance, risk, expenses and other key measures for 1,082 mutual funds.

Outlook: With so much money on the sidelines, stocks and stock mutual funds should do well again in 1989, he says.

Conservative $10,000: Phillips slips $5,000 into Vanguard Short-Term Bond Fund, a no-load (no sales charge) mutual fund that invests in fixed-income securities with slightly longer maturities than those in money market funds. But the fund could return as much as 2 to 3 percentage points more than money funds, with virtually no risk of loss of principal, he says. It has posted average compounded annual returns of 10.41% in the past five years.

Phillips pops another $3,000 into T. Rowe Price New Income, a no-load fund with bonds of even longer maturities than the Vanguard fund. It has earned average compounded annual returns of 10.33% for the past 10 years. He tucks his last $2,000 into Strong Investment Fund, which he describes as one of the more conservative funds with exposure to stocks, which constitute up to 40% of its portfolio. It boasts an average compounded annual return of 10.72% in the past five years.

Risky $10,000: Phillips splits it equally into four stock funds. Two, Royce Value Trust and Gabelli Equity Trust, are relatively new “closed-end” funds whose shares are traded on the New York Stock Exchange and are managed by well-respected money gurus Charles Royce and Mario Gabelli, respectively. As evidence of Royce’s record, his older Pennsylvania Mutual fund has posted average annualized compounded returns of 19.54% for the past 10 years. Gabelli Asset Trust had gained 35.47% in the 12 months ended Nov. 30.

Phillips favors two no-load mutual funds. One is Nicholas Limited Edition, a 2-year-old small-company stock fund managed by Albert Nicholas, whose older Nicholas Fund has posted a compounded annual return of 20.23% over the past 10 years. The other is GIT Equity-Special Growth, another small-company fund that has posted a compounded annual return of 14.9% over the past five years.

GERALDINE WEISS

Weiss, editor and publisher of Investment Quality Trends, a La Jolla newsletter, is a leading expert on dividend-oriented investing. Her newsletter’s recommendations were up 21.2% in 1988 through October, according to Hulbert Financial Digest, a newsletter that tracks performances of other newsletters.

Outlook: While the market as a whole has more room to fall than to gain, many stocks are undervalued and have little downside risk. The key is to find stocks whose dividend yields are at levels where their historical trading patterns show they were near the bottom in price and thus undervalued.

Conservative $10,000: Weiss sticks to simplicity: She puts it all in insured savings accounts or certificates of deposit. She likes to keep her CD maturities staggered so that some cash is always coming available.

Risky $10,000: Weiss taps nine stocks. Her first choice, for $1,500, is Bristol-Myers, a company that consistently raises dividends and is historically undervalued with a dividend yield of about 4.5% (she considers 4% or more to be levels at which it is undervalued). For another $1,500 she taps Xerox, which is undergoing a turnaround, lowering costs and increasing profit margins. Its yield of 5.5% makes it highly undervalued.

Weiss splits her remaining $7,000 equally among seven blue chip stocks that she considers to be close to undervalued levels, based on dividend yields. They are Schlumberger, Texas Utilities, Houston Industries, Baxter International, International Business Machines, American Medical International and Eastman Kodak.

JOHN W. ROGERS JR.

Rogers, at age 30, is a rising young star in mutual fund management. His Calvert Ariel Growth, a small-company growth stock fund, was up 31.83% this year through Dec. 9, among the year’s top performers. That followed a 11.4% rise in 1987, a strong gain in a year when the crash made losers of many stock funds.

Outlook: Select stocks of quality companies that enjoy solid market shares in stable, non-cyclical businesses, but that are also undervalued and followed by few analysts.

Conservative $10,000: Rogers places $4,000 into money market funds. The rest goes into two conservatively managed stock mutual funds with excellent long-term reputations that he expects will continue to do well even in a down market. “It’s nice to have growth as part of your portfolio,” even if it’s your first $10,000, he says.

Rogers puts $4,000 of the remainder in Acorn Fund, a no-load fund with domestic and international stocks that has posted a compounded annual return of 18.78% in the past 10 years. The other $2,000 goes into Evergreen Total Return, a no-load stock and bond fund with a compounded annual return of 17.99% in the past 10 years.

Risky $10,000: Rogers divides his risky $10,000 evenly between seven stocks. One of his favorites is Clorox, the bleach maker with a strong cash flow and balance sheet. Its share price has been beaten down somewhat by analysts’ concerns that earnings will be negatively impacted by its planned rollout of a new detergent--concerns that Rogers finds overblown and shortsighted.

Rogers also likes McCormick & Co., a spice concern flush with cash that seems to be followed by few analysts. Next he selects two office products stocks: United Stationers, the nation’s largest distributor of office products, and Sanford, known for its markers and pens.

He also picks two specialty packaging firms: Shorewood Packaging, the largest packager of records, compact discs, cassette tapes and music videos, and Sealright, the top ice cream packager. Finally, he taps SEI, a large pension fund consulting firm.

NOLA MADDOX FALCONE

Falcone is co-manager of Evergreen Total Return, a stock and bond mutual fund that’s among the top performers among so-called growth and income funds that seek capital gains as well as dividend income.

Outlook: The stock market will be sluggish, but real undervalued stocks with strong dividend yields will hold up well.

Conservative $10,000: Falcone puts $5,000 in two-year Treasury notes, currently yielding about 9.11%, higher than 30-year Treasury bonds. She tucks the other $5,000 into a money market fund.

Risky $10,000: Falcone puts it into three “depressed” stocks with good yields that will limit downside risk. “I wouldn’t mind putting my mother into these,” she says. The first $4,500 goes into Bristol-Myers, a company misperceived by investors who don’t realize that it has turned into a high-growth drug company with exciting new products in such fields as cancer treatment and orthopedics, she says.

Falcone slips another $2,500 into First Fidelity Bancorp, whose stock was pushed down following a recent announcement of a huge writeoff due to poor loans. The negative reaction has been overdone, she says. As a extra bonus, the stock yields about 7.7%.

Her last $3,000 goes to Springs Industries, a towel and comforter maker that recently bought a company that makes industrial fabric used in electronic circuit boards, aerospace construction and marine industries.

JOHN D. CONNOLLY

Connolly is chairman of the investment policy committee at Dean Witter Reynolds, currently among the most bullish of Wall Street investment firms.

Outlook: Stocks will do well largely because interest rates will begin to decline in coming months. At that point, he says, investors will pull money out of short-term fixed-income investments and put it into stocks.

Conservative $10,000: Connolly socks it simply into one-year CDs, which have a better return than Treasury bills. “If you can’t afford to lose, you can’t afford to play” with stocks and other higher-risk, higher-return investments, he says.

Risky $10,000: Connolly divides it equally among five stocks that he considers undervalued with price-earnings ratios (stock price divided by earnings per share) far under what he thinks they should be.

The first, Price Co., is a retailer that he expects to enjoy 25% earnings growth. Next he tabs Computer Associates, the nation’s biggest independent supplier of systems software.

Connolly also likes H. F. Ahmanson, a strong savings and loan firm that could benefit from lower interest rates and a resolution of troubles plaguing the S&L; federal deposit insurance system. His fourth pick is Schering-Plough, a drug firm that he expects will post 20% annual earnings growth in the next two years.

His final selection is Monsanto, a chemical and drug firm that has been hurt by adverse rulings on an intrauterine device. It is selling far under the price shareholders would get if the company was broken up, Connolly says.