Time to Buy?

Amid an epic stock market collapse, many mutual fund managers say they’re trying as much as possible to maintain business as usual--and keep their focus on the long term.

But managers’ strategies in this deep bear market vary depending on their particular investment style (i.e., “value” or “growth”), the amount of cash they have available to put to work, whether they believe many stocks are bargains at current prices, and whether shareholders are staying put or pulling out.

The Times interviewed managers of four funds--Bruce Veaco of the Clipper Fund, Susan Schottenfeld and Nicholas Galluccio of TCW Galileo Value Opportunities, John W. Rogers Jr. of the Ariel Fund and James Oelschlager of Oak Associates’ White Oak Growth Stock--to get a sense of the decisions fund managers are making in the wake of the market’s sharp losses this year and the Sept. 11 terrorist attacks.

These four funds have varied investment styles, and their recent results have differed, too.

Clipper, a large-cap value fund, has been a port in the market’s now 18-month-long storm, gaining 37% in 2000 and 1.5% through the first nine months of this year.

TCW Galileo Value Opportunities, a mid-cap value fund, also has held up well, rising 38% in 2000 and 2.7% year-to-date through Friday.

Ariel, a small-cap “blend” fund (meaning it holds a mix of growth and value stocks), rose 29% last year and is off 0.1% this year.

White Oak Growth, heavily invested in technology stocks, still managed to gain 3.6% in 2000, but this year has plummeted 51%.

Here’s a look at each of the four funds and how the managers are dealing with the worst bear market in a generation:

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Bruce Veaco, Clipper Fund: Veaco--who has co-managed the fund with James Gipson and Michael Sandler, his colleagues at value-oriented Pacific Financial Research in Beverly Hills, since the mid-1980s--thinks some pundits and portfolio managers have been too quick to declare the market a table-pounding buy.

“For some time, and even today, the market seems to be generously valued,” said Veaco, whose fund now has about 30% of its $2.1 billion in assets in cash.

That cash pile has been a buffer for the fund--but not by design.

“We don’t make strategic asset-allocation decisions” to keep a certain percentage of money in reserve, Veaco said. “It’s purely the result of our ability to find companies trading at 30% discounts to our estimate of their intrinsic value. The market is getting a little more interesting, but you can’t just close your eyes, throw a dart and hit a cheap stock.”

Veaco’s caution has helped the fund produce a 14.4% annualized return over the last three years, ranking it among the top 10% of stock funds, according to Morningstar Inc.

Still, the Clipper team has added to its stakes in three holdings that were hit hard in recent weeks, reducing the fund’s cash level from 37% of assets before Sept. 11.

“The tragedy in New York raised concern that travel has come to a standstill, [but] when American Express fell into the mid-$20s, we bought more,” Veaco said. “The company is facing a very difficult period, but it has long-term earnings power. We don’t really look three, six, even 12 months out, but three to five years.”

Clipper also added shares of United Technologies, the maker of Otis elevators and Pratt & Whitney aircraft engines, and it bought more of advertising giant Interpublic Group of Companies as media stocks got clocked.

United Technologies closed Sept. 10 at $66.20, roughly its “fair value” by Clipper’s estimation, according to Veaco. The stock dived to the low-$40s when trading resumed the following week.

“At that price it was significantly undervalued,” Veaco said. “It just happened more suddenly than these things usually do.”

The team has been taking a fresh look at other travel-related and media-entertainment stocks, including Walt Disney, AOL Time Warner and various lodging and gaming companies, Veaco said. But he and his co-managers still are trying to gauge the attacks’ long-term business impact on those companies, so they haven’t added the stocks to the fund.

“We have two rules here. No. 1 is don’t lose money. No. 2 is never, ever forget rule No. 1,” Veaco said. “I’d much rather miss an opportunity in hindsight than invest in something I can’t get my arms around.”

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Susan Schottenfeld and Nicholas Galluccio, TCW Galileo Value Opportunities: This duo has been running $300-million Value Opportunities out of TCW Galileo Funds’ New York office since the fund was launched in 1997. The Galileo funds are part of Los Angeles-based Trust Co. of the West.

Value Opportunity fell 14.7% in the third quarter, but its trailing three-year annualized return of 30.9% is tops among 193 funds in Morningstar’s mid-cap value category.

Schottenfeld said the events of Sept. 11 sent two stocks almost immediately into her price range--cruise ship operator Carnival Corp., which fell below $20 when trading resumed, and Southwest Airlines, which fell under $13.

“It won’t be tomorrow, but people are going to cruise again,” Schottenfeld said of Carnival.

And she called Southwest “the only airline with a business model that works.” The shares “are not dirt cheap” even at their recent low, she acknowledged, “but this is a top-notch stock that I just could never buy before.”

“I have to look at the earnings two or three years out,” she said. “If I look at this year’s earnings, I end up paying too much.”

Co-manager Galluccio said the fund also added investment firm Legg Mason Inc. to the portfolio. Though it wasn’t hammered like many other shares in the aftermath of Sept. 11, the price still is down 33% from its 52-week high.

Galluccio and Schottenfeld also added to two of the fund’s battered technology holdings, semiconductor-testing-equipment maker Teradyne Inc. and chip maker LSI Logic.

Galluccio said there are hopeful signs even for the devastated tech sector. “Things have stopped getting worse for a lot of companies,” he said. “Third-and fourth-quarter earnings are a wipeout, but we could be in the final phase of the bear market. Remember, the greatest fortunes are made at times of maximum pessimism.”

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John W. Rogers Jr., Ariel Fund: Rogers, founder of Chicago-based Ariel Capital Management and manager of the flagship small-cap Ariel Fund since its 1986 inception, said he has been “doing modest buying” recently.

In the gaming area, for example, the fund added to its holdings in slot machine maker International Game Technology and took a position in WMS Industries, which makes video lottery terminals as well as slots.

In advertising and media, Rogers bought more shares of ad conglomerate Grey Global Group Inc. and established a position in Radio One Inc., a network of radio stations aimed at African American markets. Radio One shares are down about 50% from their summer peak.

In the consumer area, Rogers said he bought more of two “old favorites”--Hallmark competitor American Greetings Corp. and ServiceMaster Co., which runs Merry Maid, Terminix and other home-related services.

Rogers, who has steered $450-million-asset Ariel to an annualized return of 12.6% over the last three years, calls his approach “kind of a small-cap version of Warren Buffett--we like companies with high returns on assets and strong brands.” American Greetings and ServiceMaster fit that mold, he said.

The manager also said he is taking a fresh look at hotel stocks in the wake of the attacks, but he is concerned that many hotel/casino companies carry hefty debt loads, while shares of some of the elite hotel firms, such as Four Seasons Hotels, are still too expensive for his taste. Four Seasons trades for about 21 times analysts’ average estimate of next year’s earnings per share.

Rogers said he likes to keep the fund close to fully invested at all times. So with only about 3% of the portfolio in cash, he isn’t necessarily buying with both fists.

He is also trying to stay picky given the uncertain economy, he said. “There are a lot of very, very cheap stocks right now,” he said, “but some are cheap for a reason.”

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James Oelschlager, White Oak Growth Stock: Oelschlager, who has run this tech-heavy fund since it was launched in 1992 by his Akron, Ohio-based firm, Oak Associates, said he isn’t about to “succumb to style drift” as some of his growth-fund competitors have.

“You see growth managers buying Exxon Mobil, playing it a little safe,” he said. “A lot of fund managers have cut back on tech, but I think it’ll turn out to be a mistake. I have no doubt that tech will be the leader coming out of all this. As the consumer falls by the wayside, capital spending can lead us to the recovery.”

Despite “modest” fund redemptions in the wake of Sept. 11, Oelschlager said his shareholders have generally hung tough. “It’s been heartening to see no panic, even in the face of large paper losses,” he said.

Oelschlager said he has been able to keep $3.5-billion-asset White Oak Growth nearly fully invested in stocks. As new money has come in he has put it to work in the tech sector; to raise cash for redemptions or buying opportunities he has shaved some of his drug and financial holdings, he said.

Oelschlager said he has been adding to various tech holdings, including EMC Corp. and Brocade Communications Systems in data storage; Cisco Systems in networking; PMC-Sierra Inc. and Applied Materials Inc. in semiconductors; and JDS Uniphase in fiber optics.

All of those stocks have crumbled this year, some more than 80%.

“Buy them when they’re down. It’s taken me years to learn that,” Oelschlager said.

He isn’t put off by some Wall Street pros’ warnings that tech may be a dismal business for years to come. “I think the productivity gains in the next 10 years are going to be larger than in the last 10 years, and technology is where they will come from,” he said.

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Josh Friedman can be reached at josh.friedman@latimes.com.