Pre-`alpha' Vanguard whiz prefers his Model T


Your Money


They came to Chicago from every corner of the globe - pension-fund managers, endowment managers, money managers of various types - worried that they will disappoint clients over the next few years with lackluster returns from stocks and bonds.

They have been humbled by a 45 percent drop in U.S. stocks during the 2000-2002 bear market and by puny interest rates in bonds. With prices on investments from commodities to real estate and many stocks stretched to high levels by easy money flowing throughout the world, their training tells them they can't expect vibrant returns in the near future.

It has left many pension funds far short of the money they will need to pay retirees. It also has caused plenty of money managers to do a tap dance in front of clients still smarting from the bear market and demanding high returns plus security.

So, for a week, cutting-edge investment thinkers drawn together by the CFA Institute tried to acquaint the pros with that extra something to build a little spark into portfolios without sinking them. The tools: foreign currencies, derivatives, picking through commodities, selling stocks short, a broader world view, private equity and formulas for excising risks out of the stock market.

It was as though a simpler era had come and gone. Uncomplicated portfolios of stocks and bonds were starting to look like the Model T, unreliable and so passe.

The word of the day was "alpha," the industry's favorite buzzword for the benefit investors get from investment brainpower, rather than the basic return the stock market provides without any prodding or fancy footwork.

Then came a reassuring, romantic figure from olden days: John Neff.

Neff was the legendary manager of Vanguard's Windsor Fund. In 31 years as a portfolio manager he beat the Standard & Poor's 500 index 22 times. He didn't worry about "alpha." He provided it the old-fashioned way, examining companies with a fine-toothed comb, making sure he bought them so cheaply that even if he was wrong about future profits he had built in a margin for safety.

So what is Neff's solution for investors in the years ahead? The same as always: Buy low, sell high.

Neff said the same approach that made him a mutual fund star has continued to work for him as he has managed his own funds since retiring in 1995.

He said he has averaged about a 20 percent annual return during his retirement. Over that period, the S&P 500 index averaged about 8.3 percent.

One of his favorite stocks now is Citigroup Inc. He said the stock is so inexpensive that investors are paying for its growth and then getting the dividend virtually for free. Neff always has stressed dividends in his stock picks. He also selects stocks priced at a 40 percent to 50 percent discount to the S&P index.

Besides the price, Neff likes Citigroup because it does so much business in emerging markets. "It's a lazy man's way to participate in emerging markets," he said.

He suggested one reason why professional money managers are suffering lackluster returns is that they are afraid to chart their own course. They buy the stocks that make up an index, and they do it in the same quantities as the index holds.

Neff says he's not having trouble finding cheap stocks and has found companies such as cargo transporter YRC Worldwide Inc.

Of course, he's an individual investor now rather than a fund manager. So there is one thing that he does differently: "I buttress my stocks with 30 percent in fixed income in case the wolf shows up at the door."

Contact Gail MarksJarvis by leaving a message at 312-222-4264.

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