Team spirit guides Delaware Group funds

Mutual funds


John Fields begins each week, as many executives do, with a Monday morning meeting.

But unlike most people, he actually enjoys his.

Mr. Fields, the senior portfolio manager of the Delaware Group's two Decatur mutual funds, meets with the 13 team members who manage different parts of the funds' portfolios -- such as banking or chemical stocks.

They and their computer gather on the 14th floor of One Commerce Square in Center City Philadelphia to discuss market happenings and the effects on the funds' investments.

"The real power here is that room -- a group of people who are seasoned professionals. We all don't think alike," said Mr. Fields, 51, who makes the final decisions. "I get my ideas from those people around the table."

They have created two mutual funds with assets greater than $2.3 billion at the end of the first quarter. That ranked the company 53rd in total assets among 371 mutual fund companies, according to the Investment Company Institute, a Washington trade group for mutual funds.

The Delaware Group uses a conservative and disciplined investment approach that revolves around dividend yield (a stock's annual dividend as a percentage of its price) and capital gains (profits earned when the price of a stock increases).

In selecting stocks, the company uses a bottom-up strategy to focus on those companies that are unpopular, or "out of favor," and have a greater dividend yield than the Standard & Poor's 500 stock index. If the dividend yield of a stock Decatur owns goes below the S&P's yield, Decatur's strategy is to sell it and replace it with other stocks to keep the company fully invested -- that is, 5 percent cash or less. (A stock's dividend yield dips when the price of the stock increases.)

"It's an attractive universe because we don't give up the ability to get capital gains, but pick up extra return from higher dividend yields," Mr. Fields said. "The emotional reaction in the marketplace creates opportunities to buy something with a low-risk reward versus the market, and get full capital gains to go with the high up-front yield."

The Decatur Income Fund, created in 1957, is intended to give investors current income by paying monthly dividends. Its investments are composed of 83 percent stocks, 10 percent high-yield bonds, 4 percent convertibles (preferred stocks or bonds that can be switched into common stock), and 2 percent cash.

The fund's collection of large companies with stock prices that are undervalued by the market makes it a "good conservative plan for the long-term investor and for the risk-averse investor," said Andrew Lohmeier, an analyst with Morningstar Mutual Funds, a Chicago company that analyzes funds.

The Decatur Total Return Fund, which started in 1986, has a lower yield and pays quarterly dividends. Geared toward long-term increases in stock prices, Decatur Total Return is composed of 98 percent stocks and 2 percent cash.

But Decatur's strategy, even though conservative, hasn't always paid off.

"Our batting average is good, but we don't get them right every time," he said. "Where we make our mistakes is where we get the fundamentals wrong," that is, assume the company's problem is temporary or minor when it isn't.

One bad pick or, as Mr. Fields calls it, a "classic value mirage," was IBM in 1992.

Mr. Fields said the fund managers had assumed the problems at IBM were capital-related, but the company was actually going through a product shift from mainframes to small machines with networking capabilities. Once the company cut dividends by 67 cents a share and the stock price dropped more than 50 percent, Mr. Fields said, he was forced to sell.

Another strikeout for the company was Alexander & Alexander Services Inc., an insurance and consulting firm that had endured a seven-year downward cycle in property-casualty rates in 1994.

"We thought the cycle would turn, but it didn't," Mr. Fields said. "The company cut the dividends [from 25 cents to 3 cents], which we didn't count on."

To spread the risk of such bad picks, the Total Return fund has 73 stocks spread through such industries as insurance, energy and utilities, and the Income fund has 157 stocks in the banking, energy and chemical industries.

The largest holding makes up only 2.8 percent of the funds, Mr. Fields said.

To help predict what the future holds for the stocks, and avoid costly "mirages," team members meet with industry specialists and economists to keep up on current events. Mr. Fields said the goal of the sessions is to determine whether market changes are cyclical or long-term.

"It's a very interesting challenge and an intellectually stimulating business. No two days are the same," Mr. Fields said. "I'm interested in what makes businesses work: This one successful. This one not."

Pub Date: 4/28/96

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