This fund prefers washed-out firms
Ernest G. Wiggins, Jr. disagrees. His job, as portfolio manager of the Boston-based Fidelity Group's Contrafund , is to disagree with conventional stock-market thinking.Skip to next paragraph
Subscribe Today to the Monitor
Conventional thinking now, says Wiggins, is that the current economic recovery is tenuous and may not unfold in the classic way of previous recoveries. Cyclical companies may not expand greatly; energy companies may not be vital to expansion. Another bit of conventional thinking, Wiggins notes, is that the East Coast megabanks eventually are going to go interstate, squeezing out regional banks.
What has Wiggins done? He has channeled large amounts of his mutual fund's capital into gas transmission lines, coal, rail equipment, and regional banks.
That is what Wiggins gets paid to do.
''Managing a contrarian fund, you are forced first to locate the consensus,'' Wiggins says. ''You have to determine what people are saying and what they are actually buying. You have to have an equal understanding of the thinking of the market and the working fundamentals of companies. And you have to do your own research, since most of the outside stock-analyst research reflects consensus thinking.''
And how has the fund fared? Respectably. From the first of the year, the Contra Fund (current assets $81.7 million) has increased 18.04 percent; in that same period, Standard & Poor's index was up 16.77 percent. In the 12-month period ending Sept. 1, 1983, the fund increased 37.9 percent, while the S&P advanced 36.54 percent.
Wiggins chooses to buy a stock for a variety of reasons. It can be from a seemingly washed-out company, from a company that never actually took off, or from an industry at low ebb. Wiggins tries to determine which stocks are at their fundamental low points. If a company's stock has a decent price-to-earnings ratio, and if Wiggins surmises that this industry group (despite what others are saying) is going to rally in the not-too-distant future - Wiggins buys.
Wiggins recently has weighted his mutual fund toward these groups:
* Regional banks: More than 11 percent of his fund is invested in selected regional banks, and unlike many other fund managers, Wiggins has virtually no investments in big-city money banks. It is difficult, says Wiggins, to find companies with such healthy earnings histories that have been selling at such a sharp discount as regional banks have. That makes them a good buy. And there is a hidden kicker: if interbank consolidation or takeovers by national banks occur , selected banks could be bought at higher prices.
* Natural-gas-transmission companies: More than 17 percent of the fund has gone into companies in this group. In this case, Wiggins has detected above-average yields and good price-to-earning ratios. Wiggins believes that the economic expansion ultimately is going to help these companies, and he is taking a risk that a cold winter this year, after an abnormally mild one last year, will help also.
Because Wiggins invests in companies at their low points, his fund stands to gain the most just when the companies' stocks begin to move up. Often, then, he will sell it as it becomes popular.
By following the contrarian strategy, Wiggins often finds himself not only looking in neglected areas, but finding areas within areas. With regional banks , for instance, Wiggins can focus on Texas banks, then on oil, then on banks with real estate holdings (assuming these will not be adversely affected by a predicted Southwest real estate bust).
The Dow Jones industrial average closed Sept. 16 at 1,225.71, down 14.07 for the week.