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Goldman Sachs' Ehlers Avoids the Ragged Ledge: Personal Funds
Goldman Sachs' Ehlers Avoids the Ragged Ledge: Personal Funds
New York, Aug. 17 (Bloomberg) -- Herb Ehlers, manager of the Goldman Sachs Capital Growth Fund,
believes the formula for success is to avoid ''the ragged ledge of mountain cliffs going 100 miles an
hour.''
So for the 18 1/2 years he's been managing other peoples' money, he's used the same style of
management, what he calls ''the buy-the-business approach.'' ''We buy each stock as though we
were going to buy the entire business,'' Ehlers said. ''It's kind of the Warren Buffett approach that looks
for a strong franchise, favorable long-term outlook and excellent management.''
Of course, shares of Buffett's Berkshire Hathaway Inc. have fallen 20 percent from their March 12 high
and 9 percent this year. Ehlers' Capital Growth fund is up 6.5 percent this year. That still trails the
Standard & Poor's 500 Index, which is up 9.4 percent, though it does place him in the top half of 1,382
growth funds tracked by Bloomberg Fund Performance. ''Investing money is a marathon, not a sprint,''
is the way Ehlers described that style.
Ehlers brought that style with him from Liberty Investment Management, which he sold to Goldman two
years ago. ''This was probably the best acquisition that's occurred in the investment management
business, a great fit of culture, people, product and distribution points,'' Ehlers said.
Still, the question is how well his style is serving Goldman Sachs.
The $509 million in net asset inflows to the fund in the year ended June 30, as measured by Financial
Resources Inc., still hasn't helped Goldman Sachs' overall sales, with year-over- year net sales off 75
percent. Indeed, Goldman ranked No. 35 among U.S. mutual fund families in terms of net inflows in the
first six months this year, down from the 16th position it occupied for the first half of last year.
Ehlers is confident, however, that he and Goldman will ultimately find success by finding companies
that hew to his long- standing investing approach. ''It's the toll-keeper concept rather than the bridge-
builder,'' he explained. He looks for ''companies with a dominant market-share, pricing power and
recurring revenue streams,'' and those he can buy at a discount, companies ''whose intrinsic business
value is higher than its stock price, which provides a margin of safety when you buy the stock.''
By these measures, Ehlers' researchers screen out all but about 300 U.S. companies, and the fund
holds about a third of those at any given time.
One of his biggest successes was Time Warner Inc., which Ehlers believed two years ago was selling
at half its intrinsic value, ''a substantial discount to its world-class assets,'' and which has in fact
doubled since then.
Following are criteria designed to help investors decide whether this fund suits their needs.
Contents
Ehlers' holdings as of July 31 are a who's-who of corporate America. Microsoft Corp., General Electric
Co., Time Warner, Bristol-Myers Squibb Co., Intel Corp., International Business Machines Corp. and
Cisco Systems Inc. all number among his top-10 holdings and collectively account for 18 percent of
total assets under management.
Nothing very dangerous here. So what distinguishes him from a run-of-the-mill large-cap index fund?
''The question is how do you weight them, which do you pick?'' he said. Our competitors ''are sector
rotators, momentum players, day traders. We buy stocks and put them away.''
Rarely will Ehlers find himself battling for a few shares of the latest hot Internet stock. ''A lot of
companies, when young, won't pass our screen,'' he said. ''We will miss some of the wild ups and
some of the wild downs. While we are great believers that the Internet will continue to change society
for consumers and for businesses, we are in the first half of the first inning. We'd rather let the first
couple of innings go by.''
Ehlers' newest big bet is Qualcomm Inc., which today closed at 173 1/16, up from about 26 at the
beginning of the year. While he missed some of that move, Ehlers said he captured enough, with little
of the pain suffered by investors in more volatile stocks, such as Yahoo! Inc. or America Online Inc.
Risks ''The risk is that the market goes down,'' Ehlers said. He hopes the strategy of buying good
companies that are selling at a discount to the value of their business provides ''at least good business
protection here.''
The second risk is that ''the market is a high flyer and perhaps you don't make as much on the fly,'' he
said.
Ehlers is less concerned about the second risk.
Performance
The Capital Growth Fund outperformed the S&P each of the two full years Ehlers has run it at Goldman
Sachs. In 1997 it returned 35.31 percent, while the S&P yielded 33.38 percent, and last year it returned
33.88 percent, above the S&P's 28.58 percent.
Since then, the fund's record has been more dismal, returning 6.5 percent this year through Monday,
compared with 9.13 percent for the S&P.
Over the past five years, the fund has tracked the Dow Jones Industrial Average and the S&P 500
almost exactly, though slightly below at every turn.
Leadership
At 60, Ehlers has run the Capital Growth fund or its predecessors for 18 1/2 years and has seen many
ups and downs in the markets.
A mathematics and engineering graduate of Lehigh University, he went on to do graduate work in
management, spent his early career as a sell-side analyst, and ultimately formed Eagle Asset
Management, which he ran for 14 years in partnership with Raymond James Financial. That became
Liberty Investment.
The Capital Growth fund has seven senior portfolio managers, divided between Tampa, Florida, and
New York, who help research and pick stocks.
Costs and Taxes
The fund pays two capital gains distributions a year, in September and December. Last year they
totaled 76.5 cents a share.
It has at least four different classes with varying sales and redemption fees. The Class A shares carry a
5.5 percent front- end load, the Class B shares have a diminished sales fee beginning at 5 percent in
the first year and shrinking to no fee if investments are held for six years.
The Class A shares have an expense ratio of 1.44 percent, while the Class B shares have a 2.19
percent expense ratio including 25 basis points of marketing fees.
The average expense ratio for a large blend fund the fund research firm, is 1.26 percent, according to
Morningstar Inc.
The fund carries no minimum investment requirement.
Investment Objective
The Goldman Sachs Capital Growth Fund seeks long-term growth of capital by investing in stocks of
companies that are considered to have the potential for long-term capital appreciation. It may be
considered a core investment for the most conservative portfolios.
Fund Facts To purchase the fund: Goldman Sachs Fund Management One New York Plaza New
York, New York 10004 1-800-526-7384 Following are the fund's top 10 holdings as of July 31, with the
percentage of assets each represents in the fund: Microsoft Corp. 3.9% AT&T Corp.-Liberty Media
3.2% General Electric Co. 2.8% AES Corp. 2.8% Time Warner Inc. 2.5% Qualcomm Inc. 2.4%
Bristol-Myers Squibb Co. 2.3% Intel Corp. 2.1% IBM Corp. 2.1% Cisco Systems Inc. 2.0%
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