AT&T split gave rise to a higher performer


September 19, 1993|By WERNER RENBERG

About 10 years ago, as AT&T shareholders were awaiting the company's breakup and the receipt of one share of each of the seven new regional Bell operating companies for every 10 AT&T shares, W. James Price saw a unique business opportunity.

"Why don't we create a mutual fund that could make a tax-free exchange of its shares for AT&T shares?" the Alex. Brown & Sons partner asked colleagues at the Baltimore brokerage firm. It would give AT&T shareholders an alternative to owning the shares of eight telephone companies -- the shares of a single company.

Thus, Flag Investors Telephone Income Fund was conceived.

Jim Price, a longtime "Wall Street Week" panelist who appeared on Louis Rukeyser's first program in 1970, became chairman. Bruce E. Behrens, Brown's utility analyst, was named portfolio manager.

Within a few weeks of the start of operations on Jan. 18, 1984, about one million AT&T shares worth about $65 million had come in, to be swapped for five million fund shares.

Today, the first shareholders, plus others who have invested in the fund since 1989, have interests in a $381 million fund that owns not only AT&T and seven RBOCs but also a mix of other phone and non-phone stocks.

Still managed by Behrens, it achieved an average annual total return of 17.7 percent in the five years ended June 30. The fund performed better than the 14.2 percent return of the general stock market, as measured by the Standard & Poor's 500 Index.

Its rate of return ranked first among equity income funds tracked by Lipper Analytical Services. And it beat the 16 percent return of Behrens' "Humpty Dumpty portfolio": the phone company stocks that a former AT&T shareholder would now own.

Equity income funds, usually invested 65 percent or more in well-diversified portfolios of common stocks, appeal to many investors because of their emphasis on income, their potential for some growth and their tendency to hold up well during market corrections.

Although Behrens' fund seems to be concentrated, with at least 65 percent in telecommunications securities, it covers a wide spectrum: long-distance companies such as MCI (4.3 percent of assets) and AT&T (8.1 percent); RBOCs (led by Southwestern Bell at 6.7 percent); independents such as GTE (6 percent); and foreign companies such as Telefonos de Mexico (5.1 percent).

He has changed allocations among these sectors with changing market conditions, but he hasn't pursued stocks that promised appreciation without adequate income.

Characteristics such as reliability and growth of dividends, and less sensitivity to recession, which Behrens has found in telephone stocks, have not been surprising. He con cedes, however, that earnings growth has been greater than he expected.

To enhance the fund's income, Behrens has invested 36 percent of its assets in non-telephone issues, such as health care and shopping center real estate investment trusts (REITs) and convertibles.

INVESCO (formerly Financial) Industrial Income Fund, another long-term leader, is more typical of equity income funds. No sector accounts for more than 10 percent to 20 percent of assets.

The fund's performance suffered a year ago because of its high reliance on consumer staples and health care stocks to achieve growth, but it has subsequently regained its momentum. To get the fund back on track, co-manager Charles P. Mayer says, the management team raised its bond allocation to 20 percent and beefed up stock positions in capital goods, banks and insurance.

In managing USAA Mutual's Income Stock Fund, Harry Miller tries to achieve his goal of high current income by looking for stocks that yield more than the S&P 500. Its Aug. 31 yield: 2.8 percent.

To strengthen income in recent months, Miller reduced his equity allocation slightly to 81 percent -- his is one of the equity income funds that tend to be 80 percent to 90 percent invested in common stocks -- and added to his list of convertible preferreds. Electric utilities constitute 17 percent; REITs, insurance, chemicals, oil, banks and telephones, 6 percent to 9 percent each.

By contrast, Eric E. Ryback, portfolio manager of Lindner Dividend Fund since 1984, hasn't had 90 percent of assets in common stocks in many years. He has been able to pay a high yield and achieve impressive results by investing heavily in preferred stocks. Recently, he was 46 percent in preferred, 34 percent in corporate bonds, and only 17 percent in common. Adding the 25 percent of preferred stocks that are convertible to common, he had a 42 percent exposure to stocks.

Ryback closed the fund to new investors last March. He had attracted more money than he could quickly put to work profitably, and an 18 percent cash position was hurting the fund's performance.


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