Business Week article on Brandywine. 1999 ASND "powerful earnings"
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A FUND THAT PLAYED IT SAFE--AND WAS SORRY
Brandywine put billions in cash, and investors fled
With his winsome blend of enthusiasm and cornball humor, Foster S. Friess can work a crowd. But the 58-year-old Friess, who runs the Brandywine Fund, had his work cut out for him at the annual Morningstar Mutual Fund Conference in Chicago last month. Once a five-star fund manager, Friess had missed most of
this year's stock market gain--not because of selecting bad stocks but because of
selecting no stocks.
''I want to know why the hell he went to cash,'' fumed one Brandywine
fundholder, upset that Friess had parked 78%, or some $6.4 billion, of the fund's
$8.2 billion in assets in cash for most of the first quarter. While the Standard &
Poor's 500-stock index surged 13.5%, the Brandywine Fund was up only 2.8%
in the first three months. Friess dived back into stocks in the second quarter and
is now about 95% invested, and the year-to-date return as of July 14 is just
7.2%, vs. 21.4% for the S&P index.
BAILING OUT. Friess's woeful underperformance points up the danger of
trying to time the stock market, even for seasoned pros with solid track records.
The blunder has already prompted more than $2 billion in redemptions from the
fund since January--nearly a quarter of its assets. Recapturing those dollars will
not be easy. Most of the cash flow in the business goes to mutual funds with four-
and five-star Morningstar ratings, and his fund is down to three. ''If you're not
humble in the investment business, you haven't been in it very long,'' says Friess,
who runs Friess Associates Inc., with $11 billion in assets under management,
from Jackson Hole, Wyo. ''I take the blame for being wrong.''
Friess insists that his objective was not market timing but saving his clients' assets. In the fourth quarter of 1997, his 35% weighting in shares of technology companies was getting hammered as the Asian crisis unfolded. A research trip to the Far East in January convinced Friess that Asian demand for U.S. products would dry up and that cheaper exports to the U.S. would put pressure on corporate profits and U.S. stock prices. He was right on the first two counts, but
very wrong on the third. Even as first-quarter earnings slipped, the bulls kept
running, he says, because of an onslaught of foreign investors seeking a haven in
American stocks. ''We missed the boat,'' the fund manager admits. ''Our big
mistake was not realizing the magnitude of foreign capital that would come to the
U.S. market.''
Then, realizing the blunder, Friess told his 30-member research staff in April to start crunching the numbers to see if stocks looked any more attractive based on 1999 earnings estimates--and some did. Friess bought shares of retail, consumer products, and financial- service companies--all poised to gain on the strong domestic economy and largely sheltered from the slowdown in Asia. He also came back to technology stocks, but emphasized networking and telecommunications shares instead of those dependent on PC sales. Among the top holdings now are Computer Sciences, Ascend Communications, and Conseco. ''We see powerful 1999 earnings coming from companies that were not on our 1998 radar screen,'' says Friess.
''JUST TOO MUCH.'' Even if Friess can reignite his performance, the controversial market-timing issue will linger. The trend in the investment business is that stockpickers should stay fully invested and leave it to their clients to decide how much cash they should hold. Mel Higgins, a pension-fund consultant in Cambridge, Mass., pulled $5 million of his clients' money out of the Brandywine Fund after Friess disclosed his huge cash position. ''We already had 9% cash, and when you added in his cash, it was just too much,'' Higgins explained.
Although having so much cash was unusual, it was not unprecedented. The Brandywine prospectus allows that high cash levels may be used for ''temporary
defensive purposes.'' And Friess played that defense successfully in the
past--most recently in the 1990 bear market that followed Saddam Hussein's
invasion of Kuwait. Madeline I. Noveck, president of New York-based Novos
Planning Associates, has stuck with Friess. She admits, however, that she would
have sold her clients' shares if she had known he intended to go heavily into cash.
''He saw extreme risk, and if you're not willing to allow for that, you shouldn't be
with a manager like him,'' says Noveck.
Of course, if Friess's fears had come true, he would probably be a hero to fund folks right now, and not a goat. And Friess also points out that, while his performance lagged, he did not lose shareholders' money. But in a raging bull
market, that doesn't count for much with investors.
By Andrew Osterland in Chicago
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Updated July 16, 1998 by bwwebmaster
Copyright 1998, by The McGraw-Hill Companies Inc. All rights reserved.
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