Calm Voices of Experience Offer Thoughts on Timing

When stock mutual fund managers too young to remember President Ford, Arab oil embargoes or disco tell you that this aged bull market still has miles to run, it feels right to be nervous. What could those kids possibly know?

But when a number of white-haired fund industry veterans who were around to vote for Eisenhower tell you to forget your fears and give stocks the benefit of the doubt--even at the market’s current heights--that is something else entirely.

At the annual Morningstar Inc. mutual fund conference here last week, there was enough white hair behind the latter message to at least temporarily soothe the anxiety of some of the 700-plus attendees, mostly financial planners and fund industry marketing types.

Morningstar, which has built a big business tracking and rating funds, paid the usual tribute to the funds of the moment, with panel discussions starring a few of the hottest stock pickers of the last year, including Garrett Van Wagoner of the Van Wagoner Funds, Elizabeth Dater of Warburg Pincus Emerging Growth fund and Charles A. Morris of the T. Rowe Price Science & Technology fund.

But the sessions that drew the loudest applause were those that featured some of the fund industry’s grizzled veterans, the kind of old men you’d expect would have the good sense, and the experience, to avoid a dangerously overheated market when they see one.

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Their message, however, was largely constructive: Most insisted that smart investing still entails having a long-term plan of consistent stock ownership, fine-tuning that plan when necessary, but forever swearing off the idea of trying to call the broad market’s inevitable cyclical swings.

“Everybody in this business has learned that market timing kills you,” said Ralph Wanger, who has nurtured the Acorn Fund from $7 million in assets in 1970 to $2.5 billion now, producing a 17% average annual return for shareholders over the life of the fund.

“Market timing is a fraud,” said Thomas Mathers, the 81-year-old former senior partner of Mathers & Co. in Chicago. “If you have a true growth security, you don’t sell it, you hang on to it,” he said, recounting the pain of having sold such growth stocks as McDonald’s Corp. and biotech giant Amgen Inc. too early, trying to catch what appeared to be their peaks.

Mathers’ revulsion of market timing is also deeply personal: He built up the Mathers Fund only to see his successor five years ago become a raging bear, and stay that way--causing the fund to miss most of this decade’s market advance.

To be sure, there was plenty of discussion here about the stock market’s arguably stratospheric level and about the increasingly obvious signs of rank speculation, especially in shares of young, unproven companies.

“We’ve never seen anything quite like this before,” marveled J. Gary Burkhead, chief executive of Fidelity Management & Research Corp., the Boston fund titan’s investment advisory arm. As money managers, “it’s important that we don’t become complacent” about the market, he warned.

But the view of more than a few industry veterans was that stocks, overall, aren’t absurdly overpriced, that wild pockets of speculation (such as Internet-related stocks) are merely sideshows and that in any case, while it may be late in the bull market game, there is more to come.

“Market peaks take place when everybody’s in there, when everybody has the good news,” said William M.B. Berger, founder of the Denver-based Berger Funds and a money manager from 1950 to 1994.

He argued that despite the flood of cash into mutual funds over the last few years in particular, the percentage of the average American’s assets held in stocks remains below the levels of the 1960s.

“I figure the fund industry can double its assets [from here] before stocks begin getting over-owned” by individuals, Berger said, quantifying a theme he has stressed for many years.

Of course, bold comments like that inevitably sound self-serving coming from any mutual fund industry executive. The industry is hardly in the business of encouraging people to leave it for their own good. And it’s possible that veteran fund managers are just as blithely caught up in the current euphoria as many of the youngest managers. It can be tough to see a bubble when you’re inside it.

But to some fund pros who have ridden the U.S. economy’s many ups and downs--and the bull and bear markets--of the last 35 years, this market simply doesn’t seem terribly frightening, at least not yet.

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If an economic recession occurs any time soon, corporate “earnings will go down and the market will go down,” conceded Shelby Davis, co-manager since 1969 of the highly ranked Davis New York Venture Fund. “But if we don’t have a recession, you could see how the speculative juices could really get running.”

American companies, Davis said, are reaping the benefits of the worldwide spread of capitalism in the 1990s, and those benefits shouldn’t be underestimated.

“The world got a lot bigger when the Iron Curtain came down,” he said. “It puts off the maturity of a company like Procter & Gamble” by opening huge new markets for the firm’s products, albeit not necessarily overnight.

As for the U.S. economy, Davis said, “inherently we’re optimists about this country. People line up to come here to live and work.”

Warburg Pincus’ Dater called the United States “the only country in the world that [continually] reinvents itself through the venture capital process,” as promising small companies are funded by wealthy investors, then taken public via the stock market.

Still, even some of U.S. stocks’ biggest boosters admitted at the Morningstar conference that the higher the market goes, the more difficult it becomes to want to put new money to work, as opposed to waiting for better (i.e., cheaper) prices.

Garrett Van Wagoner’s Emerging Growth fund, up about 55% this year, now has a quarter of its assets in cash.

“I’m having a little more trouble” finding stocks to buy, he said. “If I don’t think I’m going to be making money in the stocks, I just don’t buy them.”

That sounds logical, but isn’t it also de facto market timing? He’s making decisions to stay away from individual stocks with no guarantee that he can get in with that cash at exactly the right moment. That’s precisely the point made by many veteran stock fund managers, who say that if a client gives them a dollar, they’ll find a dollar’s worth of stock to buy rather than miss moves in stocks, which, while high, may go even higher.

But Van Wagoner replied, ‘I’ll be damned if I’m going to invest [in a company] if I don’t believe in it.”

Market purists could argue that Van Wagoner just isn’t looking hard enough, that there is always something worth buying. For Wanger of the Acorn Fund, the solution has been to shop extensively overseas in recent years, where smaller stocks often are inefficiently priced, he said.

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But at least one legendary investor at the Morningstar show made no bones about his current market-timing stance. William Sams, manager of the FPA Paramount fund since 1981 and an investor with a spectacular, if little-known, 30-year record in the stock market, now has 45% of his $600-million fund in cash.

Much more so than Van Wagoner, the droll Sams--whose fund is closed to new investors--said he can’t find stocks at prices he believes are reasonable, so he will wait. “Market timing is so out, to hold cash is so out,” he admitted. “But all the handwriting is on the wall for this market. It’s been on the wall for a long time.”