Jean, This Bearguard is hustling some publicity.
Fund Managers Shift Portfolios
After Stock Markets Plunge
By MARA DER HOVANESIAN, AMY HUGHES and DAVID FRANECKI
Dow Jones Newswires
NEW YORK -- Friday's huge selloff in U.S. stocks has mutual fund managers scrambling to adjust their portfolios, looking for cover in a market headed sharply south.
A higher-than-expected consumer price index has sparked inflation fears and roiled stock markets on Friday. The Dow Jones Industrial Average tumbled 617.78 points, or 5.66%, while the Nasdaq Composite fell 355.49, or 9.67%.
Although fundamental economic conditions are "sound," Robert Burgoyne, technology strategist for the Monument Funds Group in Bethesda, Md., explained the market is leveling some built-up imbalances, particularly in small-cap stocks.
"It's the nature of the markets to go to extreme emotional points in both directions," Mr. Burgoyne said.
Mr. Burgoyne said he's making adjustments to the fund's portfolio -- which lost its manager, Alex Cheung, in late March. Mr. Cheung was responsible for steering the fund to dizzying returns of 273% last year. The fund is down about 38% in the past month.
"The market is dictating right now what needs to be done," Mr. Burgoyne explained. It's a good time to review holdings and "make sure you own better-quality names."
"When the market turns around," he said, "not every stock is going to participate in that rally."
While he wouldn't say which stocks he was selling, Mr. Burgoyne said he is hanging onto Internet infrastructure companies, saying these companies that provide the hardware to make the online connections possible are keepers.
Those companies include Cisco Systems Inc., Oracle Corp., Sun Microsystems Inc., Ariba Inc. and Broadvision Inc.
Ultimately, Mr. Burgoyne said, this shakeout will create opportunities for investors who have been on the sidelines until now. He cautions, however, that many of the smaller companies favored by retail investors may not recover. Instead, he suggests putting money in "high-quality" stocks of the largest companies.
Another Chance
"If people believe in the new economy and believe that fundamental changes are going on, and they missed it before," Mr. Burgoyne said. "They are being given another chance."
Veteran money manager Martin Whitman at Third Avenue Funds in New York has "been buying like crazy" during the sell-off.
Mr. Whitman manages Third Avenue Value Fund, with $1.6 billion in assets, in addition to a small-company value and a real estate fund. He's been scooping up undervalued real estate-related, financial, and semiconductor equipment stocks that have just gotten cheaper in recent weeks.
"We don't pay attention to the markets," said Mr. Whitman, whose Third Avenue Value Fund is up 15% this year. "They are completely overrated in importance either as to their effects on the economy or what they have to do with securities investments."
Although Mr. Whitman ignores the "abnormal psychology" that has driven the stock market from record highs to lows in a matter of weeks, he said the hysteria has created some "fantastic values."
He is buying Silicon Valley Group Inc., a San Jose, Calif., semiconductor equipment maker. "It's not a slam dunk .. but I believe they are going to have huge earnings," Mr. Whitman said. He predicts Silicon Valley Group will earn between $4 and $6 a share by year-end 20002.
Mr. Whitman is also loading up on First American Financial Corp., a Santa Ana, Calif., title insurance company and D.R. Horton Inc., a home builder based in Arlington, Texas. "Some of these home builders are trading at five times earnings and they are very fine companies," he said.
In the financial-services sector, Mr. Whitman is grabbing shares of Liberty Financial Cos. (L). The Boston asset management firm runs more than $65 billion through annuities, private and institutional accounts, and 90 mutual funds.
Managers at the Denver-based Janus Capital Corp., one of the nation's hottest mutual fund companies, are looking at the downturn as a buying opportunity, according to a spokesman.
"We believe the general economic backdrop is still good," said Stephen Stieneker of Janus. "When you have gains as large as we saw over the last year, it's inevitable that you're going to have to give some back .. everybody is getting hit by this."
Short-seller Paul McEntire is among the few fund managers celebrating the stock market's decline. He runs the five-month-old BearGuard Fund offered through Skye Investment Advisors in Los Gatos, Calif. BearGuard shareholders stand to profit when stock prices go down.
The tiny $1.2 million fund is up 10% so far this year, according to Skye's estimates. The majority of those gains have come in the last three weeks, Mr. McEntire said.
Mr. McEntire sells borrowed shares, hoping to replace them later at lower prices. He targets stocks that are too expensive relative to their earnings growth.
The Nasdaq stock market has been this bear cub's playpen. And by the looks of the technology-heavy index's recent declines, Mr. McEntire said, "we could be headed for a bear market."
Mr. McEntire sharpened his claws Friday on Emulex Corp., a Costa Mesa, Calif., maker of network-access products. The company's stock tumbled despite posting a fiscal third-quarter profit of 20 cents a diluted share late Thursday, two cents ahead of the First Call/Thomson Financial consensus estimate.
Mr. McEntire took a short position in Emulex when it was trading at $100 a share earlier this year. It was overpriced at that level but continued to rise to more than $200 a share in short order, he said.
Emulex and its fellow technology stocks "got way ahead of themselves and now they are falling," Mr. McEntire said.
At a recent trading price of $41 a share, Mr. McEntire said Emulex is still pushing the valuation envelope. Its stock price isn't consistent with its earnings potential, and would be "fairly priced" at between $20 and $25 a share, he said.
Margaret Patel, who manages the $22.5 million Pioneer High Yield Fund said she's been expecting a market correction for quite a while. Her fund hasn't seen any heavy redemptions, but if the market continues on a crash course, she expects some shifts in investor sentiment next week.
"We may see a negative reaction," Ms. Patel said. "Investors may want to reduce exposure to risky assets, whether they're stocks or high-yield bonds."
The market for low-grade corporate debt, sometimes referred to as "junk" bonds, is still "statistically very cheap" with yields of 12% on average, versus the 6% yield of U.S. Treasuries, Ms. Patel explained.
In the short-term, Ms. Patel anticipates erosion in the high-yield arena, which will likely translate to even greater yield spreads.
"The challenge in the high-yield market is to forget about daily fluctuations," Ms. Patel said. A major concern for high-yield managers, Ms. Patel explained, is credit and default risk. Recently the junk bonds of air-freight company Kitty Hawk Inc. -- "a portfolio manager's worst nightmare" -- and PSINet Inc. skidded on cash flow and other concerns.
Ms. Patel added that "this is a little bump in the road for tech stocks," and that the sector remains the fastest growing in the economy and "knows how to function in a world of declining prices."
Write to Mara Der Hovanesian at mara.derhovanesian@dowjones.com, Amy Hughes at amy.hughes@dowjones.com and David Franecki at david.franecki@dowjones.com
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Saw on TV that fund managers aren't getting much redemptions in this downturn. Wonder if the source of that stat is anywhere else.
Jack |
