What One Star Fund Manager and One Patient Investor Can Teach Us
Garrett Van Wagoner is one of a dying breed. To a certain extent, so is Sam Costanza.
Van Wagoner is a superstar fund manager. The mutual fund industry used to be loaded with them. Names like Michael Price, John Neff and Peter Lynch come to mind. So do Jean-Marie Eveillard, Bill Sams and Robert Sanborn. But Price, Neff and Lynch have all retired. And although Eveillard, Sams and Sanborn continue to manage money, their performance and reputations aren’t what they were.
As for Costanza, 70, he’s a buy-and-hold mutual fund investor. The mutual fund industry used to be loaded with them too. It still is. But the ranks of these investors is certainly shrinking, as evidenced by the fact that gross stock fund redemptions through the first nine months of the year are up 40% from this time last year.
About three years ago, Costanza, a retired real estate developer, bought shares of three well-known funds, including Van Wagoner’s flagship fund, Van Wagoner Emerging Growth. Those investments represented the Hinsdale, Ill.-resident’s first foray into the stock market.
At the time, all of the funds--the others being PBHG Growth and Mutual European--were considered the among the premier funds to own in their respective categories. Shortly after he made those investments, though, all three fell off a cliff. Van Wagoner’s fund, for instance, went from being one of the top “mid-cap growth” funds in 1996 to being the absolute worst in 1997 and was average in 1998.
Although many of his peers sold during this time--Emerging Growth’s assets fell from $638.2 million at the end of 1996 to $189.4 million at the end of 1998, according to fund tracker Morningstar Inc.--Costanza didn’t.
“I kind of forgot about them,” he admits. And his forgetfulness was later rewarded.
“For a while there, I was down like 50%” in the Van Wagoner fund, Costanza said. But year to date, Van Wagoner Emerging Growth has made a stunning comeback, rocketing up 182.1% at a time when the average diversified stock fund is up about 12%. And over the last 12 months, Van Wagoner Emerging Growth more than tripled its shareholders’ investments.
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Last week, Costanza met up with Van Wagoner at the San Francisco Money Show just after Van Wagoner gave a speech on growth stock investing.
“For a while there,” he told Van Wagoner, “I used to say, ‘What a thief.’ Today, I say, ‘Keep it up.’ ”
It was just one of many signs that Van Wagoner, after a major slip-up, is back on his perch as one of the few remaining stars of the fund world. The dozens of investors who, like Costanza, flocked around Van Wagoner after his speech were another.
Like groupies rushing a rock star, these investors, pencils and note pads in hand, peppered Van Wagoner with questions about the prospects for stocks they own or are thinking of buying. “Do you still like Ariba?” one asked. “What do you think about Qualcomm?” asked another. “Would you buy Vixel?” shouted someone in the back.
But that doesn’t mean he didn’t have to account for the bad times.
In response to a question about that from the audience earlier in the day, Van Wagoner acknowledged that ’97 was indeed a difficult year, in part because of the Asian financial crisis, which slammed many of his high-tech investments. But, he said, it was compounded by the fact that “we got more valuation-sensitive.”
“In retrospect, we shouldn’t have done that,” he said, adding: “I learned my lesson of tampering with the portfolio. You stick with the best companies and ride them” up.
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This might sound like a risky strategy, especially for conservative investors who care about things like a stock’s price-to-earnings ratio. But, Van Wagoner noted, “there are no valuation models that work in the part of the stock market I work in.”
“We’re in Oz,” he said. And until that changes, he’ll have to invest with that in mind.
Rather than worrying about market volatility, he feeds off it. “We’ll hold onto a company as long as it’s executing and its industry continues to do well,” he said. If not, for instance if he senses that a particular sector is nearing a top, he’ll sell quickly, as evidenced by the 668% turnover rate his portfolio had last year. And if those stocks get pummeled because of things not related to the company or industry, then he might buy back in.
And what is Van Wagoner going to do to prevent another ’97 from happening, another investor asked.
He noted that he’s capping all five of his stock funds. His $137-million Van Wagoner Micro-Cap fund will be closed when it hits $250 million in total assets; the $118-million Van Wagoner Post-Venture fund will be closed when it hits $1 billion, as will the $560-million Emerging Growth fund; and his $106-million Technology fund and $89-million Mid-Cap fund will be shuttered once they hit $2 billion each.
Notes Van Wagoner: “You can’t manage $15 billion in this style.”
Of course, will that be enough? Morningstar analyst Christopher Traulsen says it’s difficult to say. He notes that today “the environment is friendlier to his style of investing.” That is one reason he’s done so well this year. If the markets turn against him, who knows, given his aggressive, momentum-driven style?
For his part, Costanza, who now also invests directly in the stock market, says he has learned some lessons of his own.
Chief among them, the importance of patience--especially when investing in technology and emerging-growth funds (and even more so, perhaps, if the fund manager takes risks). He notes that even his PBHG Growth fund is showing signs of life this year. In theory, high-risk investments are supposed to deliver greater gains over the long term. But, Costanza concludes, you might not enjoy those gains if you’re only going to stick around for the short term.
Do you have ideas for mutual fund and 401(k) topics for this column? Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.
