When Might Makes Right

By RUSS WILES

May 19, 1998 12 AM PT

In a great market for big-name stocks, White Oak Growth Stock fund has been at the head of its class.

This Akron, Ohio-based mutual fund ranked among the top 2% of large-growth-stock funds in the five years through March 31, according to fund tracker Morningstar Inc. It also has remained a performance leader in the last year even as it has ballooned in size, with $600 million in new assets since late 1996.

Calling the shots is 55-year-old James Oelschlager, who earlier in his career spent 15 years running the pension fund at Firestone Tire & Rubber Co. Under his direction, the fund had a $300-million surplus by the time the program was terminated in 1984.

Oelschlager founded money management firm Oak Associates the next year. The company now manages $8.5 billion in assets, including $650 million in White Oak Growth and nearly $40 million in the Pin Oak Aggressive Stock Fund, a sibling fund that invests in medium-size companies.

Oak Associates’ private-account clients include the giant California Public Employees’ Retirement System, or CalPERS, as well as pension programs run by the city and the county of Los Angeles.

In White Oak Growth, Oelschlager oversees a concentrated portfolio of only about two dozen stocks, with a hefty weighting in technology companies. Financial services and health care are the other two sectors that he currently favors.

Oelschlager has a bachelor’s degree in economics from Denison University in Ohio and a law degree from Northwestern University. He spoke recently with Russ Wiles, a mutual fund columnist for The Times.

Times: For the most part, the companies you own aren’t just big, they’re giant, especially in terms of market capitalization. What explains your preference for larger names?

Oelschlager: It’s not necessarily a preference for super-large companies. I just think that the prices of many of these stocks are attractive at this time. Particularly in the tech area, I think the strong will get stronger while the weak just bump along.

But we invest in medium-sized companies too, such as Linear Technology, a maker of integrated circuits that has a market cap of only $6 billion.

Times: The fund also has a reputation for being very concentrated, and now holds only about two dozen stocks. Explain your stock-selection process.

Oelschlager: Above all, we’re looking for companies that we think will do well in terms of earnings growth over several years, not the next quarter or next six months. We tend to be patient investors, so if a company misses its quarterly earnings-per-share estimates by a penny or two, it doesn’t bother us. It may actually give us an opportunity to increase our position.

We first try to determine which [industry] sectors are most attractive, then we shop around in those sectors. So we’re top-down managers.

If you look at our portfolio, you will see about 65% of the assets are invested in technology, although technology is very broad. Two other areas we like are pharmaceuticals and financial services, especially banks and insurance.

By contrast, we’re not spending any time looking at oil companies because we don’t think oil is attractive right now.

Times: Are you cautious on oil because prices are weak and because of the general disinflation trend in commodities?

Oelschlager: That’s right. Our basic investment theme is that inflation and interest rates will continue to decline. Tech stocks will be among the beneficiaries, while tangible-commodity producers like oil companies will face difficulties.

Times: What do you look for in a company’s management?

Oelschlager: We like managements with whom we’re comfortable--managements that are fairly conservative and not too promotional. Some managers just want to hype their organizations. We stay away from them.

Times: Big, blue-chip stocks have clearly been the stocks to own over the last five years, consistently leading the market. But White Oak stumbled in the fourth quarter, losing 8.1% as some of your tech stocks were hit. Some critics of big growth stocks say they are overpriced. What’s your argument for owning these stocks, especially tech issues, at current prices?

Oelschlager: One of the really good things is that most superior technology is developed in the United States, so American companies are the first to use it, making us the low-cost producers in a lot of industries. Also, the rest of the world needs this technology, so they buy it from us.

In addition, there will be many new products and upgrades coming along on a regular basis. For example, you have Windows 98 and new Pentium chips [from Intel Corp.] ahead.

Times: So you see good demand for technology not just here but abroad?

Oelschlager: Absolutely. Many [tech] companies are deriving about 50% of their top and bottom lines [revenues and net income] from international markets. If anything, we expect to see those percentages increase.

Times: How about pharmaceuticals and financial services? Why do you still like those industries, even after steep gains in the stocks since 1994?

Oelschlager: Pharmaceutical companies are like a technology play, from the standpoint that most drugs are developed in this country. The rest of the world benefits from these drugs and buys them from us.

There’s the additional factor of the aging population. As you get older, you have to start taking more medications. It’s a one-way street. More people are going to be taking pills.

Times: Pfizer is one of your top pharmaceutical holdings. Any other favorites?

Oelschlager: Merck.

Times: How about financial services? What do you like there?

Oelschlager: One could argue that it, too, is a technology play, coupled with a consolidation theme. That’s because the technology expenditures that banks must make are huge, which means only the large banks can afford the investment. We own some shares in Morgan Stanley, Dean Witter, but our financial services stake is concentrated in banks, particularly Citicorp and NationsBank.

Times: Have the recently announced mergers involving Citicorp [with Travelers Group] and NationsBank [with BankAmerica] changed your view on those companies at all?

Oelschlager: They’ve just made me more convinced that these stocks are the place to be, because these will remain major players amid the consolidation that’s occurring in the banking business.

Times: What causes you to sell a stock--a changed earnings outlook perhaps?

Oelschlager: The most frequent reason we sell a stock is to make room for something else. You wake up one morning all excited about some other company, and you look in the portfolio to identify the least attractive holding, which you sell to raise the money to buy the new stock.

Being an optimist, I’m always finding more stocks to buy than my clients have money. So you have to use that kind of discipline or you’ll wind up with too many investments.

Times: White Oak has grown very rapidly since late 1996, from $50 million in assets to $650 million. Doesn’t such rapid asset growth make the fund harder to manage?

Oelschlager: No. It hasn’t caused any problems from an investment standpoint because the capitalizations of the stocks we buy are so large. As we’ve grown, we basically have just bought more of the same stocks.

Times: Both of your funds, White Oak and Pin Oak, are tax-efficient, meaning you have had relatively low portfolio turnover so far, minimizing taxable capital gains payouts. Are you trying to manage them for tax efficiency?

Oelschlager: No. That’s just a fallout from the way we manage money.

Times: You manage roughly $500 million for CalPERS, the California pension fund, with that total scheduled to increase within the next few weeks to $1 billion. Are you pursuing a different strategy here?

Oelschlager: No. . . . It’s the same approach we use to run money for everything and everybody, including the growth fund.

Times: Do you have a general outlook for the stock market and the economy?

Oelschlager: Not for the stock market, just the economy. We think the economy will continue to surprise people by its strength and by how low inflation is and how strong corporate profits will remain.

Times: You underwrite a stock-picking competition involving students at several colleges in and around Ohio?

Oelschlager: Yes. It’s up to 10 now, including some non-Ohio schools such as the University of Wisconsin. We’ve funded 10 colleges with $50,000 each, to be managed by students in the stock market. We offer prizes at the end of the year: $15,000 for first place, $10,000 for second, $5,000 for third and $5,000 for most improved. We have a banquet in January, and for the teams that are far away, we fly them in. All the students get up for three or four minutes and talk about what they did and what they learned. Nobody knows who won until everyone gets together.

Times: What’s the purpose of the competition?

Oelschlager: First, it starts a small endowment for the schools, which receive a rebate worth 5% of the value of the stocks each year for their use. Second, it gives students an opportunity to get some experience with real money. I’ve always felt that one of the nice things about college is that it’s a place where you can make mistakes without permanent ramifications.

Administrators at some of the colleges worry that the students might lose some money. My attitude is, so what? First, nobody will take a portfolio from $50,000 down to zero. And even if some students drop the amount down to, say, $5,000, it’s a learning experience. You learn from your losers as well as your winners--sometimes you learn more.

Times: Is it true that you became involved with the stock market at age 12?

Oelschlager: Yes, when I bought my first stock, General Motors. Then I bought American Airlines. I had a large paper route when I was a small kid and made a lot of money. I kept investing and really enjoyed it. Even when I was in law school, I spent a lot of time following the market. After I became a lawyer, I realized I liked investing more. That’s when I decided to switch fields. I figured that since I was going to work many hours during my career, I might as well do something that I enjoy.

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White Oak Growth Stock Fund

Strategy: Seeks capital appreciation by investing in a concentrated portfolio of large growth stocks.

VITAL STATISTICS

Year-to-date return, through Friday: +21.7%

Avg. general stock fund: +12.6

Three-year avg. annual return,

through March 31: +39.4

Avg. large growth stock fund: +28.3

Five biggest holdings:

1. Cisco Systems

2. Linear Technology