4 funds likely to make a comeback

Old ways the best: Good managers look at the balance sheet

Dollars & Sense

October 07, 2001|By Russel Kinnel | Russel Kinnel,MORNINGSTAR.COM

In financial crises, the old ways are the best. Managers who know a company's balance sheet, understand management and have good contacts at their companies can be confident enough to step in and buy oversold companies. Those focused on whether a company will meet next quarter's expectations, though, may be at a loss.

Quantitative funds can also run into trouble. The reason is that markets and investors are processing the latest news faster than a computer. Some quantitative funds look for companies that analysts are predicting will grow their earnings at a faster rate than the previous quarter. However, analysts can't adjust all their numbers every day, so the market's best guess is more accurate than the average of analysts' estimates. Other quantitative inputs - such as past earnings - become devalued, too.

I have no idea if the market is close to the bottom, but it's a good bet that some stocks are. Here, then, are a few funds I'd be happy to write a check to amid the market turmoil.

Longleaf Partners: This is the sort of fund you want sniffing out bargains. Management is experienced and focused on the long term. In addition, they'd rather let cash build than buy something that isn't up to their standards. They've taken their share of losses in September due to a big investment in hotel stocks, but this fund and the others in Longleaf's stable are a good bet.

Right now, Mason Hawkins, Staley Cates and John Buford say there are bargains to be had. They say they're putting cash to work in stocks so that they are closer to being fully invested than they've been in a while.

In a commentary just posted to the Longleaf site, the managers wrote, "We have added to some of our best ideas, which have become even more discounted, and we have been able to buy several new companies that we have wanted to own for a long time at the right price."

To their way of thinking, there are reasons to be optimistic: "The implied return opportunity in all four funds has improved as our price-to-value ratios have declined and are below their historic averages."

Weitz Value: Manager Wally Weitz says he's starting to get excited about the values turning up in the market. That's great news coming from a picky investor like Wally. He practices a rigorous Buffett-style cash flow analysis that could succeed in unearthing some deals. Last week, Weitz bought $400 million worth of stocks for Value and Partners Value in existing positions and new ones.

"The stocks we are buying have good assets and strong enough balance sheets to withstand a prolonged recession, if necessary," Weitz wrote on the firm's Web site. "Our plan is to continue to buy bargains as we find them, and not to worry about how they perform in the short run."

Like a lot of good value investors, Weitz and the Longleaf crew tend to be early. That means it might be a year or three before we look back and admire the great picks they made in 2001.

Janus Mercury: With the typical tech stock selling for a fourth of the price it was going for 12 months ago, you have to figure some growth manager will find some winners. Warren Lammert and the Janus analysts have good contacts and they know how to model a growth company. When tech comes back, so will this fund.

American Funds EuroPacific Growth: Foreign markets are down nearly as much as the United States' are this year. Add to that the rather dreary performance they've produced in recent years and there ought to be some bargains out there.

As well as they know the companies they invest in, the managers of this fund stand as good a chance as anyone at finding gems.

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