Hoping to Ride Out
The Market Storm
By Barry Henderson
09/21/98
Barron's
Page 45
A portfolio chief shows surprising patience Patrice Neverett still believes in large-cap growth stocks, even though the market's latest swoon has tested her commitment.
"If investors can hold their breath here, I think we're going to get through this," she says. Not necessarily the first thing you expect to hear from an assetallocation specialist who can dump all the stocks in her portfolio at a moment's notice. After all, her Eastcliff Total Return fund has a free-wheeling mandate that allows her to do pretty much as she pleases when it comes to getting in and out of the equity market.
Right now, she still has 69% of the fund's assets in stocks. The other 31% is split up between intermediate bonds and cash. Although she's raised some cash recently, this allocation hasn't fluctuated much in the past several years.
So far, her shareholders don't have much to complain about. This year, the fund has returned 10.65%, compared with 1.39% for its peer group according to Lipper Analytical Services.
The decision to get into Pfizer in January of 1995 is a good example of the savvy stockpicking that's kept the fund on top. She made the pharmaceutical house one of her largest holdings because it had a good drug pipeline and solid earnings growth potential-nothing more complicated than that. "There was no big exciting reason to get in when I did," she recalls. The excitement, of course, developed after Viagra, the anti-impotence medication, was introduced. Her average cost in the stock is $19 per share. It recently was trading around $99.
She's also sticking to technology-related favorites, such as Lucent Technologies and Nokia, which have been big winners over the past 12 months. Like other large-cap growth investors, Neverett favors "top tier" companies -- read mega-caps -- with good earnings momentum that are leaders within their industries. Occasionally, she ventures into the realm of smaller companies when she feels she has a good handle on management. Plantronics, which manufactures telephone headsets and has a market capitalization of over $800 million, is a good example of the kind of small-cap she likes.
Right now, she's most bullish on MCI WorldCom, the telephone company created when WorldCom acquired MCI. The deal, which closed on September 15, created the second-largest long-distance carrier and largest competitive local-exchange company in the world. Like other bulls on this marriage, Neverett believes cost savings will be realized faster than anticipated. MCI also has had better-than-expected growth from its voice and messaging businesses, which hit $3.9 billion in the second quarter from $3.6 billion in the first. That 7.7% gain was better than the 5.2% some analysts had expected. As a result, some MCI WorldCom-watchers have raised their earnings estimates. In a July 31 report, CIBC Oppenheimer analyst Harry Blount boosted his 1999 and 2000 earnings-per-share estimates from $2 and $2.92, respectively, to $2.04 and $2.97.
That kind of growth and upward revision momentum is bound to carry the stock from $47 to $60 in the next 12 months, according to Neverett. That assumes a P/E multiple expansion from 23 to 30.2. Nevertheless, she believes investors will begin to turn to MCI WorldCom as a safe haven in a sea of uncertainty.
She's enamored of drug maker and consumer-products giant Johnson & Johnson for much the same reason. "People are not going to stop buying their products during a recession," she asserts. Even though this stock has lagged the market for much of the year, she sees it trading at $100 in 1999; it recently was quoted at 76.
Despite the bullish calls on these stocks, she's not buying them right now. Like any number of portfolio managers, she's not convinced the time is right to thrust herself into the action. Indeed, although she's clinging to her core equity positions, she also has been raising cash since the market began tanking in July. To get the portfolio to 10% in cash, she's dumped some "weak sisters," particularly financial issues such as Citicorp. She says losses in emerging markets have affected the New York money-center bank's shortterm earnings power, and she's skeptical that the stock will recover any time soon. She held the stock at its 52-week high of $175 per share, and rode it down to $120 before unloading it. She still owns NationsBank, but may not for much longer. Although it doesn't have any international exposure to speak of, investors have punished it, along with other big banking concerns. As recently as July 14, the shares were trading at 88 7/16. Since then, they've plummeted; recently, NationsBank was at 59. Although she can't seem to convince herself that there is any change in the fundamentals of the bank, she's not unconcerned about the plunge in price. "This stock is just not helping me," she complains.
Indeed, there does seem to be a bit of price momentum built into her approach, which explains why she would rotate into out-of-favor groups while they're getting hammered. Neverett admits that she'll sell quickly if a stock doesn't meet her price target after 12 months. She also doesn't stick around to find out what happened when one of her positions doesn't meet its quarterly earnings numbers. Although she's not shy about flushing a stock out of her portfolio, that doesn't happen too often; the fund's annual turnover is a relatively modest 38%.
The real stabilizing influence in the portfolio is Neverett's bond stake, which makes up 21% of the fund. She holds intermediate agencies and credit-cardbacked securities, which all have triple-A credit ratings.
Her largest fixed-income holding at the end of the first quarter was a Federal Home Loan Mortgage Corp. debenture that pays a 6.718% coupon and matures in 2008, This single bond accounted for about 4% of the portfolio. As rates have slipped and the yield curve has flattened, Neverett has moved into shorter-duration bonds. For the most part, however, she's not inclined to buy Treasuries or to dramatically increase her exposure to bonds. "I'm not jumping around as much as other asset-allocation funds," she says.
Despite her consistent style and strong track record, Eastcliff Total Return is still relatively undiscovered. The no-load fund has just $22.6 million under management. That's somewhat surprising, given its performance. In the 10 years through June 30, it had an average annual return of 14.32%, placing it in the top 11% of domestic hybrid funds, according to Morningstar. For the trailing one-, three- and five-year stretches, the fund did even better. In each period, it finished in the top 1%.
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