Franklin Fund Veteran Sees Patience As Key
Peter McKenna
10/21/98
Investor's Business Daily
Page B3
Manager Palmieri Buys And Holds For The Long Term
After 33 years of running Franklin Growth Fund, Jerry Palmieri, 70, has developed more than a few opinions about how a successful fund should be handled.
"You have to look at your customers as nice people who stop by your house to drop off their money," he said. "They're coming back in several years to pick it up, at a time when they need it the most. You can't let them down."
Palmieri has not let his customers down. The $1.9 billion fund, up 9% through Monday, is rated B+ by IBD as its total return of 53% in the 36 months ended Sept. 30 beat 83% of its peers.
"The fund opened in 1948 and I took it over in 1965," Palmieri said. "The most important thing I've learned in all those years is that you have to be patient, even after you make mistakes. You have to buy good stocks and hold them for the long term."
To say that Palmieri thinks long term is an understatement. He has held the majority of the 95 stocks in his portfolio for a very long time.
"I got Merck when it was 12, Pfizer when it was 9, Automatic Data Processing when it was 11 and Bristol-Myers Squibb when it was 24, just to name a few. I also bought Hewlett-Packard and IBM years and years ago," he said. "My strategy is to keep these stocks forever."
A high turnover rate, according to Palmieri, "is a quick way to get a loss for your customers, because they get clipped by the IRS every time you sell a stock (for a profit). Nowadays managers turn their funds over all the time. When I have to sell a stock I take it as a sign of failure of judgment; I shouldn't have bought the stock in the first place."
The veteran manager says the willingness to admit a mistake is a mark of a good fund manager.
Jerry Palmieri
"Throughout my career there have been several times when I have bought the wrong stock," he said. "When I realized my mistake, I got rid of the stock right away. If you hang on, hoping things will get better, you can get hurt. You have to cut your losses and not be stubborn."
Like many managers, Palmieri has sold stocks too early. "I sold Microsoft way too soon," he said. "The trick in that case is to wait until the stock price declines and buy it again. Don't chase the stock just because it's going up. Be patient."
The fund has a broad investment charter, which allows Palmieri to buy almost any stock he wants. He has a heavy weighting in health- care and drug stocks. His top holding (4.7% of assets) is Schering- Plough, followed by Pfizer (3.3%). Palmieri has avoided Internet stocks in favor of computer-related companies.
"The problem with the Internet is that I can't tell which company is going to end up the winner in the long run," he said. "I've seen lots of companies take over a niche and become popular with investors. But after a while, some of them drop out and some rise to the top. If I knew which Internet stock would be on top 10 years from now, I'd buy it."
Palmieri, however, has identified several companies that he believes will stay on top of the computer industry. He owns Compaq, IBM, Computer Sciences, Dell, Cisco Systems, Intel, Apple, Microsoft, and Sun Microsystems.
"During the recent crack in the market, I added to most of these stocks," Palmieri said.
Palmieri is a booster of airline stocks. "I'm one of the few managers in the business who likes the airlines," he said. "I've always done well when I buy airline stocks during a recession and hang on to them for a long time. They sell for practically nothing during a recession; you can't miss."
This time, Palmieri is adding to his airline positions before a recession hits. "Some of the airlines have improving fundamentals, and they are selling at low P-Es," he said. "Now is the time to buy."
He added to his holdings in the biggest airlines, American Airlines, Delta, United and British Airways. He also bought some of the smaller airlines, including Alaska Air, Continental, KLM and Northwest.
"I don't think the prices of these stocks can get much lower, even if we get hit by a recession," Palmieri said.
Palmieri runs the fund from his home in Jamestown, R.I. "I love this business," he said. "The key, like anything else in life, is to be patient and invest for the long term. A fund manager who jumps in and out of stocks will eventually disappoint his customers, and they deserve better than that."
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