THREAD --The Wall Street Journal -- January 14, 1998
Fund Track:
Brandywine
Goes Mainly
Into Cash
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By Robert McGough
Staff Reporter of The Wall Street Journal
Foster Friess, one of the best-known technology investors in the mutual-fund industry, has sold virtually all of his tech stocks and moved two-thirds of the $9.5 billion Brandywine Fund he manages into cash.
Mr. Friess, who has been visiting companies and government officials in Asia, said in an interview from Tokyo that he became worried in November that the crisis in Asian financial markets "would be more significant than we thought" in its impact on the earnings of U.S. technology companies. Moreover, U.S. stock prices "had huge run-ups," and were factoring in very strong earnings growth that he didn't believe would materialize. "There was a risk that we had not seen."
Moreover, it wasn't just tech stocks that Mr. Friess -- and a team of analysts and managers -- sold for Brandywine. He also cleared out aerospace and oil-service stocks, which he felt would suffer from the Asian downturn, given their high prices. To be sure, Mr. Friess also says that he has been buying back into some tech stocks as prices have fallen, and he can be a quick in-and-out trader.
But he also says the Asian woes will spread to the types of large, well-known companies he doesn't invest in. Citing what he calls global overcapacity in automobiles, as well as the likely diminished ability of Asian airlines to buy aircraft, he says, "It's hard to see how that will be helpful to" General Motors and Boeing.
Mr. Friess's Brandywine Fund has earned strong returns over the years investing in fast-growing small and midsize U.S. companies, and the fund usually owns a big chunk of technology stocks. From the end of 1985, when the fund opened its doors, through Jan. 8 of this year, it has gained an average 18.2% annually. That beats the 16.8% annual return of the Standard & Poor's 500-stock index, including reinvested dividends, during that 12-year period. And it places Brandywine in the top 5% of all mutual funds operating throughout the same period. Mr. Friess also manages the newer, smaller Brandywine Blue Fund, which invests in larger companies.
In 1997, like many funds that invest in smaller companies and technology stocks, Brandywine Fund lagged well behind the S&P 500's 33% return, gaining a disappointing 12%. The worst trouble hit in the fourth quarter, when the fund lost 14.1%. So far this year, the fund has lost 2.2% through yesterday's close, against a loss of 2.3% for a Lipper index of growth funds.
The 57-year-old Mr. Friess lives in Jackson, Wyo., is a born-again Christian and likes to wear cowboy hats. He is a philanthropist who urges other executives to follow suit, and backs up his advocacy with quotes from the Bible. Contrary to some reports, Mr. Friess still owns Friess Associates, which manages Brandywine. A similarly named, but unrelated, asset-management firm -- Brandywine Asset Management -- was sold last year, prompting some confusion on Wall Street.
Mr. Friess supports conservative causes. In a move widely seen as opposing the National Endowment for the Arts, he donated $40,000 to a music festival in the Jackson Hole area on the condition that it reject $10,950 in federal and local-government funding.
Mr. Friess has been in Asia the past few days to gauge the prospects for U.S. companies that sell to Asia. His conclusion: "Bottom line, there are more negatives than positives." One worry in the future is whether China will devalue its currency, which could set off a new round of punishing Asian currency devaluations, he says.
Fans of Mr. Friess, and analysts who follow Brandywine, like the fact that it doesn't just rely on corporate "guidance" on earnings. "I think they're unusually creative in terms of the detective work they do to understand what's going on at their companies," says Kenneth Gregory, publisher of No-Load Fund Analyst. Brandywine last raised a big cash position in 1990, a move that protected it from some of the market's decline at the end of that year. But the fund got back in a bit late, missing some of the subsequent rebound when stock prices rose.
Bill D'Alonzo, one of the co-managers of Brandywine Fund, says one issue facing many U.S. companies is global overcapacity and competition from cheaper Asian imports. Given Asian nations' "desire to keep jobs, and generate hard currency, that could be disruptive for many U.S. companies," Mr. D'Alonzo says.
Mr. Friess says that Brandywine's big cash position shouldn't be considered "market timing," and the fund isn't doing anything like selling stocks short to bet on a U.S. market decline. But he says that in reviewing the holdings, "stock by stock, we felt there was an additional risk" introduced by the Asian crisis.
Mr. Friess says he looks at the fund's stocks in a personal manner: "My high school basketball coach and my 88-year-old mother are in the fund. Do I want [them] to be in this stock?"
Brandywine's remaining stocks are mostly in the pharmaceutical and retailing industries, which Mr. Friess expects to be undamaged by the Asian crisis. Mr. Friess says he is reluctant to discuss specific stocks because of his appetite for rapid trading.
On Sept. 30, according to Morningstar Inc., Brandywine's five biggest holdings were Compaq Computer, computer-storage firm EMC, Cisco Systems, Texas Instruments and 3Com. By Dec. 31, according to Brandywine, its top five holdings had completely turned over, and included Bristol-Myers Squibb, Conseco, Nordstrom, Office Depot and H.F. Ahmanson. One technology stock Mr. Friess says he sold before it took a pounding was Adaptec, a maker of computer adapter cards.
Besides Tokyo and Hong Kong, he has been to Seoul, South Korea, and Taipei, Taiwan. He said he went to Asia, in effect, to talk to customers and competitors of U.S. companies in which he invests in or is interested. "We were seeing if there were companies that would prosper or be enhanced by what we see in Asia." He says he isn't interested in investing in Asian companies, partly because of poor disclosure of financial information.
"Over the next 15 years, technology is always going to have a role in the portfolios of people who are trying to grow assets," Mr. Friess says. "But there are times, lasting maybe three to six months, when it's not the place to be."
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