Now what happens?

Kiplinger's Personal Finance Magazine, August, 1998 by Manuel Schiffres

Eight years after the dawn of the amazing, never-say-die bull market of the 1990s--during which the Dow Jones industrial average nearly quadrupled--investors are wrestling with a new new world order: The deepening recession in Japan and the collapse of its currency. Renewed concerns about the health of Asia's emerging economies. Plunging commodity prices. Rising wages. And, perhaps most important, slowing growth in corporate profits. Adding to concerns is a phenomenon rarely seen in recent years: Stock prices are falling even as bond yields drop, too. Previously, falling interest rates were a boon for stocks.

This new global uncertainty has given most fund managers plenty to worry about as they head into the second half of 1998. There's precious little money in their coffers for the bargain hunting that could shore up a weakened stock market. At last look, a record-low 4.2% of the $2.8 trillion in stock-fund assets was in cash.

So what to do? In the past it paid not to worry about the next turn of the market, but to just find good stocks (or good funds) and shut your ears to the noise coming from Wall Street. That's how Tom Maguire runs Safeco Growth, the second-ranked aggressive-growth fund over the past one and five years and a top performer over the past three years. He allows that although his $1.6billion fund holds no cash now, he might hold 15% or 20% in cash if he has trouble finding attractive stocks. But, he says, "I wouldn't make a big market call. An awful lot of extremely smart people have been hurt because they made one big mistake."

Instead, Maguire, 44, has run up big numbers by buying one stock at a time; he focuses on companies of any size capable of producing above-average growth and whose stocks trade at below-average price-earnings ratios. Over the past year, holdings in radio companies American Radio Systems, Chancellor Media and SFX Broadcasting boosted returns, as did a stake in Jackson Hewitt, a tax-preparation firm whose stock tripled before the firm was bought out.

For other manager, an urge toward caution is tempered by the knowledge that cautious investing hasn't worked in this decade. "My objective is to be fully invested because that's wee my shareholders want me to be," says Charles Bath, who rode Nationwide fund to the number-one slot among growth-and-income funds over both three and five years by buying large, above-average companies at average prices. "I try no to think about the market because when I do, I'm usually wrong."

For sure, theses are tumultuous times for investors. By and large, managers who are active stock pikers still can't beat the indexes. As U.S. stocks falter, European issues are rising sharply, with hints of more growth to come in the months ahead. Bond investors must rely on profits from capital gains as yields fall. In short, there's no familiar script for investors to follow. But you can start by eavesdropping on some of the most successful fund managers of recent times.

ON THE SIDE OF CAUTION

THE NUMBER-TWO LONG-TERM-GROWTH FUND over the pat 12 months, FMI Focus, owns only 45 stocks, and recently ten of them accounted for half of the $19 million in assets. Focus was fully invested in stocks in mid June, but co-manager Richard Lane admits he is leery. "The Asian thing is tricky," he says. "It can impact companies in a lot of ways. There are real serious risks to corporate earnings. Right now I don't have any companies so compelling that I want them to be 10% or 15% of the fund, so I'm a little more diversified than usual."

Lane and associate Ted Kellner seek out undervalued "obscure stocks without much Wall Street coverage, where we think we can get a research edge. We want and demand growth, but we just don't want to pay for it." Most of their stocks sport price-earnings ratios of between 15 and 24, and most of the companies exhibit similar profit growth.

Another concentrated fund with sparkling numbers and a cautious manager is Weitz Hickory. Its honcho, Richard Lawson (see "Funds That Concentrate Their Bets," June), stood out by owning fewer than 30 stocks selling at significant discounts to what they would fetch in buyouts. Three industries in particular--financial services, cable TV and cellular-phone services--gave Hickory a boost at one time or another this past year. Recently, however, nearly one-fifth of the $163-million fund was in cash because Lawson has had trouble finding reasonably priced stocks.

Also heavily into cash--to the tune of a hefty 40% of assets--is GAMerica Capital, Manager Gordon Grender is unusual because he runs a U.S. stock fund out of London. He describes himself as "a bit of a contrarian" who's "quite prepared to buy contentious situations." Grender, whose $9-million fund is first in the long-term-growth category over the past year, tries to hold fewer than 30 stocks and let his winners run. Much of his success in the past year may be attributed to holdings in out-of-favor retailers, such as Best Buy, Mercantile Stores (which was bought out) and United Auto Group. "The great thing about America is that if a company has a good retailing concept, it can expand with a minimum amount of capital," says Grender.