Barron's this week -- amzn gets a puny mention at very end of this article.
August 17, 1998
Tipping Balance Toward Growth
That's boosted Blackrock fund's returns
By BARRY HENDERSON
Fund of Information | Fund Scope | Cash Track
Despite concerns about the overvaluation of the largest companies in the S&P
500, the cult of the mega-cap stocks continues, even among the likes of
balanced-fund managers.
Andy Damm, who runs the equity portion of the Blackrock Balanced fund is a
case in point. He hasMicrosoft, American International Group, General
Electric and Bristol-Myers Squibb as his top four holdings, and he thinks they
still merit their lofty valuations. "I think current prices are justified because
you're still getting predictable, consistent earnings" from this group, he says,
echoing the conventional wisdom that's kept this group aloft for the past three
years. The real question, of course: Is there a change in the wind that favors
small-caps going forward? Two weeks ago some observers noted that
small-caps outperformed large-caps as the Russell 2000 was down less than
1%, compared with the Dow Jones Industrials, which were off 3.2%.
Nevertheless, Damm says he isn't inclined to change the core holdings in his
fund just yet: "I suppose it's inevitable that the prices [of the mega-caps] will
correct at some point, but I don't think that's going to happen in the near
term."
This fund's returns over the past three years reflect the Teflon performance of
the blue chips. So far this year, the fund has returned 9.47%, compared with
4.74% for the average balanced fund. For the trailing three-year period, it
came in with a 19.33 annualized return compared with 15.39% for its peer
group average.
The bonds in the fund are run in classic Blackrock style. Co-manager Keith
Anderson, who handles the fixed-income side, takes pains not to make big
interest-rate bets, so his bonds typically have a duration that's in line with the
Salomon Brothers Broad Investment Grade Bond index. Anderson tries to
boost returns by making value-oriented picks that are undervalued. That
strategy comes with a good deal of turnover; almost all of the fund's 173%
was attributable to the bond side last year. Nonetheless, he says this part of
the portfolio is the ballast that smooths the fund's ride through choppy waters.
"At most, I'm going to add 100-200 basis points in performance" over the
index, he says.
The real oomph in Blackrock Balanced comes from the equity side, which
makes up 65% of the portfolio. That's a little bit more in stocks as compared
with its peers. (According to Morningstar, the average balanced fund has
56.3% in stocks, 35.1% in bonds, and 5.9% in cash.) "We think that over the
long term, equities will outperform bonds, so that's why we have a bigger
allocation," Damm says. Certainly not revolutionary, although a bit ironic
coming out of someone who works for Blackrock, one of the best-known
bond shops in the country. He notes that the last time the asset allocation
formula was rejiggered was in November, when bonds were ratcheted up to
40% and stocks came down to 60%. (The portfolio holds virtually no cash.)
That weighting didn't last too long, though, and now Damm says it's unlikely to
move around much in the near future.
Besides the core mega-cap names, Damm
also layers in equal doses of value and
high-octane growth stocks. Although value
stocks in general have underperformed the
market during the past couple of years,
Damm's had good luck with his picks
during this period. Two success stories:
Black & Decker and Peco Energy.
Recently he's been buying Washington
Mutual, the big California thrift that is in
the throes of acquiring H.F. Ahmanson.
Although the Street cheered this deal when
it was announced, Washington Mutual disappointed investors during the past
quarter when it said cost savings from the merger would flow to the bottom
line slower than anticipated. "They said they'd push cost savings into late
1999. Originally, they led people to believe it would be more like early '99."
Jonathan Gray, a Sanford Bernstein analyst, said in a research note that he
expected the cost reductions would more likely approximate $250 million in
1999 than the $304 million he had previously estimated. Washington Mutual
management had pegged the figure at $340 million earlier in the year. That
fact, combined with slower loan growth, led him to cut his estimates from
$3.03 to $2.94 for 1998. For '99, Gray reduced his earnings estimate to
$3.47 from $3.60. The stock dropped to 38 1/2, down 2 5/16 or 5.7%.
Will Washington Flub It?
Damm contended the selloff on this downgrade was overdone. "We aren't
particularly concerned if the cost savings get pushed out a couple of quarters,"
he says. Damm looks for earnings growth of 30% in 1998 and 20% in 1999.
At its current price of 36 15/16, the stock is trading at 12.3 times its 1998
consensus estimate of $3. "This stock screams good-value cheap, plus you
also have the potential for big earnings growth." He acknowledges the
possibility that Washington Mutual will flub the deal with Ahmanson. Damm
argues that this "execution risk" is certainly not unique to Washington Mutual
as the financial-services industry consolidates.
Although he's been keeping an eye on value ideas like Washington Mutual,
Damm is actually more interested in growth names like Staples, Citicorp,
Lucent Technologies, Cisco Systems and Intel. "We've actually been moving
some into more growth names than value right now."
When he's evaluating a more high-flying growth name, Damm says he wants
to see "earnings growth clicking on all cylinders right now." And don't look for
America Online or Amazon.com in his portfolio any time soon. "There's just
too much risk in names like that with sky-high P/Es," he says. "You can get
indirect plays on the Internet like Lucent and Cisco that make more sense on
a risk-adjusted basis." A balanced view, indeed. |
