Long-Term Buyer in a Bear Market
Despite a Drubbing in Bank Stocks, Veteran Manager Jim Stratton Is Still Bullish
By Tim Quinson
Sunday, August 30, 1998; Page H03
Fund manager Jim Stratton, who has managed other people's money for almost 40 years, remains bullish on U.S. stocks, even after the Standard & Poor's 500-stock index tumbled 12 percent in six weeks.
Stratton, 62, worked through the market depression of 1973-74 and the 1987 market crash, and he sees few similarities between those periods and today.
Back in 1973-74 and again in 1987, interest rates were rising to check inflation, Stratton said. That's not the case these days, a period when interest rates and the inflation rate are both falling.
"Add these two factors together and I expect the bull market to continue," he said. "What we've seen the past month is a significant correction in a long-term bull market trend."
Stratton said he has been using available cash in his $60 million Stratton Growth Fund to buy stocks the past two weeks.
"The U.S. economy and financial system is even stronger today than it was a month ago relative to other countries," Stratton said. "The U.S. market will continue to attract funds from investors in countries such as Japan, and that should serve as a major support for stock prices."
Stratton does try to minimize the risks that his fund takes. When copper prices started falling at the start of the year and economic conditions worsened in Asia, Stratton sold his stake in Phelps Dodge Corp. at about $60 a share. The decision proved to be the right one: The company's stock now trades at $45.06 1/4.
Stratton's heavy reliance this year on bank stocks, though, has hurt the fund's performance, which was down 3.23 percent this year after slumping 11 percent in the past four weeks.
Stratton invests in companies with below-average price-to-earnings ratios and above-average yields. He said he won't even consider buying a stock unless its yield is a third higher than the average of the S&P 500 and its price-to-earnings ratio is two-thirds of the S&P 500 average.
The combination means "we're buying companies we think are undervalued," he said.
Stratton's search for value has kept a chunk of his fund's assets invested in bank stocks for the past 15 years. Today, the Stratton Growth Fund has about 20 percent of assets in bank stocks such as First Union Corp., Commerce Bancorp Inc. and PNC Bank Corp., and another 16 percent in insurance stocks such as American General Corp.
"Bank stocks have been an excellent place to be because there's so much consolidation in this industry," Stratton said.
This year, however, bank stocks have declined about 15 percent on average. "My feeling is the regional banks that have no international exposure are screaming buys," he said.
Take Compass Bancshares Inc. in Birmingham. The bank has a 3 percent yield and the stock trades at about 12 times this year's earnings estimate of $2.90 a share, Stratton said. Compass also is an acquisition target because the bank operates in a region where the big banks have no presence and its market value is just $3 billion, he said.
"It's just a matter of time before someone buys Compass," Stratton said.
The Stratton Growth Fund has more than 35 percent of assets in shares of financial services companies, mostly banks and insurers. These stocks will be vulnerable if U.S. interest rates rise, Stratton said.
The fund also tends to do worse than rival stock funds in periods when shares of technology and other fast-growing companies are excelling, he said. "We're really a value fund."
The Stratton Growth Fund, which opened in 1972, rose 8.75 percent in the 12 months through Friday, ranking No. 347 of 875 "growth" stock funds tracked by Bloomberg Fund Performance.
The fund's longer-term record is more impressive. It rose at an annual rate of 16.9 percent in the past five years, placing No. 105 of 322 growth stock funds.
Stratton started managing other people's money in 1960 after graduating with a master's in business administration from Harvard Business School.
He first worked at Philadelphia-based Cooke & Bieler and then moved to Wall Street as a money manager at Drexel Harriman, which became Drexel Burnham Lambert Inc. In 1972, he left Drexel to start his own firm, Stratton Management Co.
Today, Stratton Management, based in Plymouth Meeting, Pa., a suburb of Philadelphia, oversees about $2 billion of assets for clients. The firm has 42 employees, including 14 portfolio managers.
Stratton said he has no plans to retire: "This is my avocation as well as vocation."
Management fees and operating expenses for the Stratton Growth Fund are 1.11 percent, or $11.10 for each $1,000 invested. That compares with the average 1.4 percent expense ratio of U.S. stock funds, according to Morningstar Inc.
As with most mutual funds, people should be aware of the tax consequences. Stratton Growth Fund paid $2.06 in capital gains and 34 cents a share in a taxable income distribution last year.
The Stratton Growth Fund is designed for long-term investors, Stratton said. The fund has lagged behind rival funds over the past year, but it has risen at annual rate of 15 percent over the past quarter century, he said.
"We position this fund for risk-averse investors," Stratton said.
Stratton Growth Fund
Stratton Management: 1-800-634-5726
Nasdaq symbol: STRGX
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