Growth fund managers win with turnarounds


August 15, 1993|By WERNER RENBERG

The stock market was approaching a cyclical low in September 1990 when Will Danoff, manager of the tiny Fidelity Select Retailing Portfolio and an assistant to Magellan Fund manager Peter Lynch, was promoted to run the $287 million Fidelity Contrafund.

In succeeding Jeff Vinik, Mr. Danoff took on one of Fidelity's oldest and best-performing equity funds -- one characterized by a contrarian investment policy. His predecessors had achieved an average annual total return of 15.8 percent for the prior five years, ranking Contrafund 12th among 172 growth funds monitored by Lipper Analytical Services.

Mr. Danoff did more than sustain the fund's momentum.

Applying his own style as he tapped Fidelity's extensive equity research resources, he capitalized on a market surge to boost the fund's annual return to 25.7 percent for the five years that ended June 30. That gave the fund the top ranking among 210 growth funds tracked for the period.

And he did so despite large sales of shares to investors, who were attracted by his record of beating the Standard & Poor's 500 Index while incurring only slightly more volatility. Combined with portfolio appreciation, they raised Contrafund's net assets to $4.1 billion -- up $2.1 billion in 1993's first half-year alone.

To put all that cash to work, Mr. Danoff has doubled the number of companies in the portfolio to 750 -- increasingly including large ones.

What has he been buying?

"Companies that haven't done well but are poised to do better," he says. "I don't buy what everybody is selling when everybody is selling. My shareholders don't want me to own the new lows list."

His stocks tend to be those of economically sensitive companies that depend on an improvement in business conditions. Or companies that he expects to benefit from important new products, management changes, restructuring or improved balance sheets.

"If I'm early in identifying a turnaround," Mr. Danoff says, "we can have the earnings increase and a higher multiple."

Recently, his biggest position was DSC Communications, which makes fiber optics equipment for phone companies here and overseas. Other major holdings: Chrysler, semiconductor companies and Japanese brokerage firms, which profited from the recovery of Japan's stock market.

If each of his stocks doesn't fit the definition of what a pure contrarian might buy, it's OK. "The goal is capital appreciation."

That -- not income -- is, of course, the goal of other growth fund managers. The best also seem to find attractive growth stocks in this low-growth environment -- largely through bottoms-up research and analysis aimed at spotting companies poised for profit surges.

Having managed other people's money for more than 40 years -- nearly half of the time as chief of his own Berger 100 Fund (and Berger 101, a more conservative fund) -- William M. B. Berger has followed a simple philosophy: "Buy the stocks of companies with demonstrable quality streams of earnings and hold 'em. Sooner or later, earnings will be recognized.

"When nitwits dump good stocks, we simply add to our positions. As a result, we have a delicious average cost."

Berger 100 has 70 stocks ranging from technology issues such as Motorola and Solectron, to Fruit of the Loom and Franklin Resources, sponsor of Franklin mutual funds.

Visible earnings also are important to Friess Associates in managing Brandywine Fund's 200-stock portfolio. (Minimum initial investment: $25,000.) "We try not to be too early," says Clarke Adams, a management team member.

The team looks for companies whose earnings are growing at least 20 percent annually but whose stock prices may be less than 17 to 18 times the coming year's earnings.

They may be growth companies in exciting new technologies, such as Newbridge Networks, or companies increasing their market share in stable industries, such as carpet maker Shaw Industries.

Tyler Smith, manager of Alliance Growth Fund (formerly Equitable Growth), is motivated by themes as well as expected earnings growth. The recent environment of moderate growth, low inflation and low interest rates, for example, led him to concentrate in financial stocks. His largest holding: Phoenix Re, a property reinsurance firm.

While emphasizing companies of medium capitalization, he also has used "large cap" companies, such as Eastman Kodak and Sears Roebuck, because of "their restructuring potential."

Unlike many other managers, Glenn Fogle doesn't have to worry about sudden waves of purchase or redemption requests that could hurt the performance of his $118 million Twentieth Century Giftrust, the smallest and most volatile stock fund in the Twentieth Century family. That's because its shares are held in irrevocable trusts as gifts -- for children, charities or others -- for at least 10 years.

This permits Mr. Fogle to concentrate on optimizing a portfolio of 50 to 60 small companies' stocks, chosen from names generated by the firm's data base of companies with accelerating earnings. When a company's growth rate slows down, he sells and seeks && a replacement.


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