USRX 06.19.96 WSJ News
The Wall Street Journal -- June 19, 1996
SOUTHEAST JOURNAL
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Heard in the Southeast:
With a Little Help From Darwin,
Tiny Knoxville Fund Beats Rivals
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By Rick Brooks
Staff Reporter of The Wall Street Journal
KNOXVILLE -- This is one place where Main Street really does beat Wall Street.
This serene town on the edge of the Great Smoky Mountains boasts a single mutual fund
run by two portfolio managers, one of whom wears hiking boots and sprinkles
Darwinian thoughts into his conversations and letters to investors. But the fund, IPS
Millennium Fund, which is only 17 months old and has just $3.8 million in assets, has
delivered top results.
IPS Millennium Fund has gained 35.2% in the past 12 months, ranking it 10th among
the nation's 473 growth and income funds, according to Lipper Analytical Services Inc.,
a Summit, N.J., publisher of mutual-fund data. In comparison, the average fund in its
peer group has returned 25.4%.
More-recent results are impressive too. So far this year, IPS Millennium Fund has
ranked 13th among all the funds in the category, earning investors gains of 17.4%,
compared with 10.2% for the average fund. The Knoxville fund's performance was
aided by a 6.1% return in May alone.
The tiny fund's results are proof that decent returns can be found in some
out-of-the-way places, and not just at big investment firms in New York or -- in the
Southeast -- Atlanta and Charlotte.
So far, though, IPS Millennium's performance isn't bringing a mad rush of investors
with open wallets. Neither are the fund's no-load status and relatively low expenses, or
the 30-second ads that hawk the fund during breaks in a therapist's afternoon call-in
show on a local AM-radio station.
So for now, portfolio managers Robert Loest (the Darwin fan) and Greg D'Amico are
contenting themselves with smaller triumphs, like the day late last month when someone
walked into their four-person office in downtown Knoxville after reading about the
fund in the local newspaper. He opened an account on the spot.
"We're at a disadvantage because we haven't come from a big money-management firm
background and are in a relatively poor section of the country," Mr. Loest says. "We're
doing this as hard as you could do it."
Mr. Loest, 52 years old, takes on the heavy-duty stock research, and he obviously isn't
your typical spreadsheet cruncher. He holds a doctorate in biology but gave up research
and, in his words, "checked out of society for a while," working as a blacksmith for 10
years.
A decade ago, after starting a new career as a financial planner, Mr. Loest was
introduced to Mr. D'Amico, now 32, who worked for a local insurance company but
was itching to sell a wider variety of investments. The pair opened their own
money-management firm, Investment Planning Services Inc., which now manages about
$11 million in assets. Six faithful clients were the original investors in IPS Millennium
Fund, putting up a total of $100,000.
Today, Mr. Loest's investment strategy is influenced mightily by his upbringing. A
sticker on the laser printer in his office reminds him to "Question Authority," and
certainly he does. "A person with a Ph.D. in biology," Mr. Loest contends, is able "to
view the world and the economy in a more appropriate way than people who are
traditionally trained in finance and economics."
So while most fund managers select stocks using price-to-earnings multiples and other
well-worn methods, Mr. Loest instead applies Darwin's theory of evolution: Which
companies are the most likely to prosper as the world changes?
Not surprisingly, IPS Millennium Fund leans heavily toward firms with a strong
technology bent. More than 40% of the fund's assets are in telecommunications,
computer or information-related stocks. Among the largest single holdings: Cisco
Systems, the San Jose, Calif., company that helps computer networks communicate with
each other; wireless-communications giant Motorola of Schaumburg, Ill.; and Andrew,
a communications-systems maker based in Orland Park, Ill.
To make sure they are picking up only the fittest stocks, Messrs. Loest and D'Amico
search for companies that control the most market share in their industry. They reject
everyone else -- even the No. 2. The reason: Because the leaders already hold an
advantage, they won't be threatened as much as smaller rivals by price cuts or a
downturn in business.
"All you have to do is buy the market leader and hold on . . .," says Mr. Loest. "Unless
[the leader commits] some major, mind-boggling screw-up."
That leaves one last major screen: Is the company really creating wealth for
shareholders? IPS Millennium Fund is one of the few funds around that picks stocks
using a measurement known as economic value added, or EVA. The calculation adjusts a
company's after-tax operating profit to reflect the cost of debt and equity capital -- and
shows the net cash return on the money provided by shareholders.
Mr. Loest buys only stocks of companies that have a positive EVA, which means they
are earning more than their cost of capital and increasing value for shareholders.
So far, the fund appears to have a preponderance of solid stocks. Out of 59 issues
currently held by IPS Millennium, only 13 would be losers if they were sold right now.
And Messrs. Loest and D'Amico expect further gains from a number of stocks that have
already produced big returns.
Two of the fund's big winners: Andrew, the communications-systems maker, which has
climbed 62% since IPS Millennium bought shares in the company; and Viking Office
Products, Los Angeles, which is expanding quickly, especially in Europe. The fund's
original investment in Viking has gained 38%.
The managers have dumped only one stock since the beginning of the year, Analog
Devices. But they have no intentions at the moment to get rid of the fund's current
biggest laggard, Linear Technology of Milpitas, Calif. Their original $64,000
investment has lost 15% of its value because weak demand and cutthroat competition has
slowed the integrated-circuit maker's growth rate and battered the stock price.
"I just ignore it," Mr. Loest says, because he expects Linear Technology to leave its
rivals in the dust someday.
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Big Bets
Top holdings of IPS Millennium Fund
Fri. P/E
Company (Symbol) Close Ratio
Cisco Systems (CSCO) $55.25 43
Intel (INTC) 73.00 18
Motorola (MOT) 64.63 22
Andrew (ANDW) 53.00 41
Frontier Insurance (FTR) 35.75 14
Applied Materials (AMAT) 34.25 10
U.S. Robotics (USRX) 88.00 52
Oracle (ORCL) 33.83 43
Equifax (EFX) 26.75 26
Note: P/E ratios are based on trailing 12-month earnings
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Box-Office Hit: Movie Gallery surged 17% to $35.875 last week after the movie-rental
chain, based in Dothan, Ala., said it agreed to buy Home Vision Entertainment, a
55-store chain in Brunswick, Maine, for $32 million. Movie Gallery already has
acquired about 75 video-rental stores so far this year.
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Washout: Synalloy, Spartanburg, S.C., tumbled 15% to $16 after alerting investors that
earnings for the second quarter ending July 1 will fall short of analysts' estimates of 58
cents a share. One problem: Demand for textile dyes manufactured by Synalloy, usually
strong during the spring months, is unexpectedly sluggish this year.
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