From today's IBD ...
Ratings Update:
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DELL - 99 - 95 - AAD
CSCO - 97 -95 - AAD
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CPQ mentioned in this article:
Alliance's Rissman Touts Virtues Of Value Manager Searches For Good 'Price With Reasonable Growth'
Date: 2/25/99
Author: Katie Sweeney
Last year may have been a time of jubilance for many growth fund investors, but their value fund counterparts weren't doing much celebrating.
While the average growth fund gained 21%, value funds struggled, returning a mere 5%, according to fund tracker Morningstar Inc.
That wide gap in performance is exactly why Paul Rissman says investors need to balance their portfolios with both growth and value funds.
''Growth and value go in different cycles,'' said Riss- man, manager of $2.3 billion Alliance Capital Growth & Income Fund , which he characterizes as a value fund. ''You can't really predict in any given year whether value or growth will do better. The prudent investor will have exposure to both.''
He points to the records of the Russell 1000 Value Index and the Russell 1000 Growth Index, which both track large-cap stocks. From 1979 to 1998, growth beat value 11 out of 20 years, and value beat growth the remaining nine years. In 11 of those periods, the outperformance of one index was by more than 10%, he says.
Investors who try to time the market by switching in and out of growth and value are just asking for trouble, Rissman says.
''In general, people buy at the top and sell at the bottom,'' he said. ''By making sure you're evenly balanced between growth and value, you guarantee that you're going to participate in the growth upside and the value upside.''
Despite the fund's value bent, Rissman doesn't disregard growth when choosing stocks.
''We consider ourselves more 'price with reasonable growth,' '' he said, as opposed to the popular growth-at-a-reasonable-price strategy. Morningstar classifies it as a large-blend fund.
Rissman, 42, uses a quantitative model that narrows a 500-stock universe down to about 150 stocks. From there he hand-picks the names for the 83-stock fund.
He looks for stocks with rising earnings estimates and those that are cheap on a normalized earnings basis. The fund's analysts also come up with five-year price targets.
Although Rissman sometimes buys stocks with high price-earnings ratios and low dividends, the fund's overall weighted average P-E ratio must be lower than the S&P 500's, based on forward earnings estimates, he says. The overall dividend yield, meanwhile, must be higher than the S&P 500's.
Growth & Income is a bottom-up, sector-neutral fund, keeping its sector weightings within 5% of the S&P 500.
The strategy seems to have worked so far. The fund has an A- grade from IBD, as its 36-month return of 91% as of Jan. 31 beat 89% of all funds. Going into Wednesday, the fund was up 1% for the year, trailing the S&P's 4% gain.
The fund's top sector right now is financial services, which accounts for 19% of assets.
''On a stock-by-stock basis, a lot of financial stocks are undervalued,'' Rissman said.
He added to his position in money-center banks such as Chase Manhattan Bank in August and September, when the stocks were crumbling and earnings estimates had been slashed. Rissman felt the group had been punished too harshly for the global financial turmoil, and that earnings growth would be fairly steady as banks restructured and generated more global market share.
In the fourth quarter, he was proved right, and Chase began to recover. It hit a low of 35 1/2 on Oct. 8. On Tuesday it closed at 81 7/8, a new high.
Sometimes it can be a challenge to find undervalued stocks in certain sectors, he says. When that happens, he picks the best values of the bunch.
For example, his top holding as of Jan. 29 was Bristol-Myers Squibb, at 4.6% of assets. It trades at 32 times forward earnings. First Call data project a 1999 earnings rise of 13% to $4.06 a share from $3.58 in 1998.
''I don't really have any large-cap pharmaceuticals that are undervalued,'' Rissman said. ''But Bristol-Myers has a valuation toward the lower end of the group, and its new drug pipeline is better than average.''
He faces the same problem in the tech sector, which accounts for about 13% of the fund. One of his top holdings within that area is Compaq Computer.
''It's not undervalued, but compared to Dell it's quite undervalued,'' he said.
Compaq trades at 25 times forward earnings, while Dell trades at 53 times forward earnings.
Rissman will cut back on a stock or sometimes cut it loose when its multiple starts to skyrocket, or if its fundamentals break down.
For example, he recently trimmed his position in MCI WorldCom after its P-E grew too rich. |
