‘94/’95 : Words to the Wise : Four Top Money Managers Share Investing Advice
The year 1994 savaged mutual fund managers. For the first time in roughly a decade, the average fund posted a loss--many for the first time ever. Yet a handful survived. Some even thrived, holding close to prinicples that worked.
Here are four such survivors--managers who beat their respective group averages even in a tough year.
Never let your emotions overrule good judgment.
Fund: PBHG Emerging Growth
Manager: Christine M. Baxter
Assets: $145 million
Objective: Growth through purchase of fast-growing, small, domestic stocks.
Performance: 23.8%
Load: 0
12(b)1: 0
Expense ratio: 1.4%
Minimum investment: $1,000
Top holdings: Fair Isaac, Micros, Infosoft
Phone: (800) 809-8008
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Chalk it off to Catholic schooling.
Christine Baxter is a 25-year-old who knows the meaning of discipline. And it shows. The manager of PBHG Emerging Growth culls a universe of 280 small company stocks each week, checking them for earnings projections, cash flow, sales and long-term growth rates.
The top 40% of this universe becomes her list of companies most likely to succeed. Then she delves deeply into these firm’s balance sheets and business plans, looking for logical gaps or earnings surprises.
And finally, she picks 75 to 80 companies that are worth buying and snaps up a portion of their shares. But if analysts predict that one of those companies will post disappointing earnings, it’s out. Baxter doesn’t get emotionally attached.
“With these stocks, you have to take the emotional element out of it because when they disappoint, they can be down 40% in a day,” she says. “With our discipline, it’s hard to maintain that emotional connection. The universe is ranked once a week. If you are emotionally attached to a stock that’s at the bottom, you have to defend why you own it.”
Occasionally, you can, she says. But it’s rare.
In many ways, Baxter seems an unlikely money manager. She’s 25. A woman. A philosophy major.
But don’t be fooled into thinking that means Baxter can’t perform as well as the gray-haired and gray-suited guys at the big money management firms.
In 1994, PBHG Emerging Growth posted nearly a 20% profit, contrasted with losses at the average aggressive growth fund, according to Lipper Analytical Services in New York. In 1993--Baxter’s first as a money manager--her fund earned a tidy 30%.
With returns like that, virtually everyone might be tempted to invest in Baxter’s fund, but she says no. Despite the good two years, the fund is risky, she says. The net asset value can swing dramatically in just a single day, so this isn’t a fund for proverbial widows and orphans. It’s only for people who are willing to invest for five years or more and who don’t mind taking some risks.
Currently, technology stocks comprise about 40% of the portfolio. That’s not because of ideology, Baxter notes. It’s simply because some of the brightest ideas and growth prospects are coming from fledgling computer, software and communications firms, she says. After that, PBHG Emerging Growth has a high concentration of consumer products companies--firms such as Safety First, which makes household safety items for children; food companies and health care.
At minimum the firms her fund will invest in must be growing both sales and earnings by 20% per year, Baxter says. However, on average, they’re growing far faster. Over the past 12 months, the average earnings per share growth of the stocks in her portfolio amounted to 73%. A good number of the companies are literally doubling in size each and every year, she adds.
“We don’t do any market timing,” Baxter notes. “We stay fully invested all the time.”
As for the future, Baxter expects more of the same. It may be another tough year, she acknowledges. But when a tough year produces an 18% return, it’s even tougher to complain.
The wise investor doesn’t try to predict trends.
Warren Lammert, manager of Janus Mercury Fund, has been managing public mutual funds for less than two years. But in that time, he’s put managers with far more experience to shame. The Mercury fund, which opened in May of 1993, has posted a 22.9% profit since inception. This year, when his peers were lucky to simply not lose money, Lammert’s fund has earned more than 14.9%.
Yet the 32-year-old money manager isn’t bragging. When asked about the secret of his success, he points to savvy stock analysts at Janus and to maxims spouted by the company’ top dog, Tom Bailey.
“Tom loves to quote Adam Smith and he’s constantly reminding us: ‘To win, you must first not lose,’ ” Lammert confides. “We look for individual values. We try to avoid unattractive bets. In some years, that produces good returns.”
Specifically, Lammert says he’s on the lookout for companies with rapid earnings growth and low prices. And he benefits from the fact that he’s been given lots of flexibility. He can buy shares in big companies or small companies. It doesn’t matter if the firm is domiciled here or overseas.
When stock prices rise to the point where the company is fairly priced based on its earnings prospects, he sells. With that in mind, Lammert was heavily into technology early in 1994, but when tech stocks soared, he sold. He bought shares in health care companies at the point when health reform started collapsing, and came away with a profit.
Health care and high tech remain an important part of Mercury’s portfolio, but some of the fund’s biggest bets are overseas, Lammert says. The fund’s top holdings, for example, are Nokia, a Finnish cellular phone company; SAP, a German software firm and Astra, a Swedish drug company.
As for the future, Lammert hesitates to guess. “I am much better at finding individual values than predicting trends or the markets,” he says. “But we are not going to see the easy money that we saw in the 1980s. People need to reset their expectations to lower overall rates of return.”
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Fund: Janus Mercury
Manager: Warren Lammert
Assets: $674 million
Objective: Principal growth through investments in domestic and international equity markets.
Performance: +14.9%
Load: 0
12(b)1 fees: 0
Management fees: 1.33%
Minimum investment: $1,000*
Top holdings: Nokia, Finland; SAP, Germany; Astra, Sweden.
Phone number: (800) 525-8983
* Minimum is $250 for IRAs. Janus will waive minimums for those who agree to invest at least $50 per month.
Success is more a matter of side-stepping disasters than finding great buys.
Fund: Fidelity Overseas
Manager: John R. Hickling
Assets: $5 billion
Load: 3%
Expense ratio: 1.28%
Objective: Long-term capital appreciation through investments in foreign securities.
Performance:
Minimum investment: $2,500
Top holdings: Deutsche Bank
Hitachi
Nomura Securities
Phone: (800) 544-8888
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Japan took a lot of money managers by surprise when its equity market started falling nearly five years ago. With Japanese equities down 10% to 20% from their highest levels, a number of institutions jumped back into the market before it fell again. And again. And again. By 1993 Japanese equities had plunged 63% from their high points and appeared to be recovering. Then they took another hit at the end of that year and many managers simply bailed out.
Although some believed recovery was on the way, the Nikei had disappointed so many, so badly for so long that few were anxious to invest in Japanese stocks in 1994. One exception was John Hickling, the 35-year-old manager of Fidelity Overseas, and, until October, manager of Fidelity Japan.
“Of course, in hindsight everything is clear, but a year ago I was looking at the market and seeing that interest rates were at very low levels, the government was passing a stimulative package and cutting taxes, which could only be good,” says Hickling. “The odds were that the economy was going to surprise on the upside rather than the downside.”
At the same time, Hickling was visiting hundreds of companies all over the world and seeing very positive signs at Japanese firms.
Managers of Japanese companies were coping with their country’s dismal economy by moving to reduce costs and improve overseas distribution and production channels.
Good companies were working hard to get better, and were selling for reasonable multiples of earnings. This struck Hickling as a recipe for profits. He starting buying stock in a variety of Japanese companies, from Hitachi to Nomura Securities, in late 1993. His fund’s 1993 performance was hurt when the market took another hit, but that has been the key to his success in 1994.
Fidelity Japan earned a tidy 16.5%, largely under Hickling’s watchful eye. Fidelity Overseas, which has a broader reach, posted about a 2% profit, which may not dazzle but compares favorably to the performance of the average international fund, which lost 2% of its value in 1994.
Still, Hickling talks more about side-stepping disaster than about finding great buys. He held shares in just one Mexican company when the floor dropped out from under the peso in December. He also missed the bloodletting in the markets of Hong Kong, Malaysia and China.
His secret? “We visit one company at a time and try to make sense of the world,” he says. Simple translation: He doesn’t closely analyze the economics of nations. He looks at the financial picture of an individual company. When that picture looks bright he buys, no matter where the company is.
“You have to spend about 15 minutes looking at the macro-economic picture,” he said, “but we try to stick to things that we have a snowball’s chance in Hades of getting right. What we can do is find good companies that are doing things right.”
Hickling can invest anywhere in the world except the United States, since the fund’s investment objectives are foreign stocks. Right now, he believes the future is bright.
Now that speculative bubbles have burst all over the Third World--in Hong Kong, China and Latin America--he’s finding bargains in a variety of markets.
“I am quite optimistic for ’95.”
A company that is good to its workers will be good to you.
Fund: Women’s Equity Mutual Fund
Manager: Linda C.Y. Pei
Assets: $1.2 million
Performance:
Objective: Equity growth by investing in companies that are good to women
Load: 0
12(b)1 fees: 0
Expense ratio: 1.5%
Minimum investment: $1,000
Top holdings: Aetna Life, Bell South, AMR
Phone number: (800) 424-2295
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Few mutual fund managers can honestly say that their investment strategies are a result of their childhood, but for Linda C.Y. Pei, it’s a fact.
The founder of Women’s Equity Mutual Fund in San Francisco says the pluralism of her youth engendered the concept: She buys companies that are good to their female employees.
To explain, she hearkens back to childhood. Her Chinese parents, who both worked outside the home, maintained that men and women were equal in the workplace, she says. But Pei was raised in Japan, where gender plays a pivotal role in career advancement. Then when she came to the United States in the early 1970s and attended Stanford University’s business school, the women’s issue was at the forefront of American consciousness. Roughly 10% of her graduating class were women, who were convinced that “if we work hard, we can all make it to the top,” Pei says.
Out of school, Pei took a job in banking and returned to Japan. Now, working with senior managers at many major companies, Pei had the opportunity to watch how companies actually operated. She emerged both impressed with the fierce loyalty Japanese men develop for their employers--who treat them like valued members of a team--and disgruntled about the blatant discrimination against women in Japanese society.
“Then, in 1991, I returned to the States. I looked at the statistics and said, ‘What happened?’ Statistically, the number of women in senior management is the same as it was when I graduated from business school in the ‘70s,” she says.
Instead of criticizing the system, Pei decided that the best way to effect change was to support it with cash. She and a friend pooled their own money and opened Women’s Equity Mutual Fund with a simple concept. Find good companies in all industries and then screen them based on their actions and policies related to women.
The idea was simply this: Workers are loyal when they’re treated with respect. Loyal workers work harder and try harder to boost company profitability. Roughly 50% of the work force is female. So a company that’s good to women, as well as men, is twice as likely to thrive in the long run than one that’s not.
The fund has been operating for less than two years, so it’s a bit too soon to tell whether this theory will prove true in the long run. But, in a year when more traditional investment approaches brought nothing but losses, Pei’s fund is in the positive column. For the 12 months ended Nov. 30, the fund was up 5.85%.
And Pei is optimistic both about the prognosis for her fund and for women in the workplace.
“I am really encouraged,” she says. “When I get a chance to go out and meet women and tell them about the fund, the amount of enthusiasm is incredible.
“We have to bring new solutions to today’s problems,” she adds. “Women bring a different perspective to the problems that companies are now addressing.”
