When the Tokyo stock market did its kamikaze act last Monday, Tim Schilt could feel the downdrafts in his office on Wall Street. As the portfolio manager of MErrill Lynch's Pacific Fund, MR. Schilt had a significant part of $20 million in investments in the Tokyo market.
Naturally, Mr. Schilt was relieved when the Japanese market took flight again the next day and more than recouped its losses. Not only did the fund recover, but is also stayed in the running as the best performing mutual fund of the year.
As of the end of September, according to Computer Directions Advisors Inc., a statistics-gathering firm located in Silver Spring, Md., the Pacific Fund is up 12.8 percent. Its nearest rival is the Magna Capital Fund, up 11.6 percent. In the same time period, the Standard & Poor's 500 was down 11.1 percent.
In an interview Mr. Schilt said the fund's success stems from its philosphy of investing in a disciplined manner in stock exchanges in the Pacific region. The Pacific Fund makes what Mr. Schilt calls "a profitability evaluation profile" of each market. In this evaluation, the fund examines such factors as earnings growth, the average return on equity, price-to-earnings ratios, and the average stock price to cash flow.
In the case of japan, for example, the fund discovered that over the past 20 years the average return on equity has been 10 percent, the average price-to-earnings ratio has been 20 times earnings, and the price-to-cash flow ratio has been 7.6.
Thus, Mr. Schilt looks for companies with higher growth rates than the market but with a discounted stock price. In summer, 1980, recalls Mr. Schilt, the fund was positioned in such firms as Matsushita, Canon, Pioneer, and TDK where earnings growth rates were outstripping price earnings. The fund rode the stocks up -- and down. These electronic wonders suddenly found their export markets drying up when the yen Strengthened. Thus, their earnings and stock prices dropped deeper than the Tokyo market. When the market fell 6 to 7 percent, the electronics companies' stocks fell 20-30 percent.
Although the portfolio manager dosen't believe the game is over for these stocks, he is now branching out into companies with mainly domestic operations. He figures that when the Japanese economy perks up later this year, consumer spending in Japan will rebound as well. Thus, the portfolio manager is casting his lot with such companies as Yamazaki Baking and Hasegawa Komuten. Both companies he says, have a higher return on equity than the average company and sell at lower stock multiples. He's hoping japanese investors agree with him and boost those multiples.
The Yamazaki Baking company owns a chain of convenience stores -- much like the Seven Eleven chain in the US -- and Hasegawa is the largest high-rise condominium builder in Japan. (Yes, the Japanese like condos too.)
One of the reasons the fund has outpaced other growth funds is that 38 percent of its assets are in cash, earning 17 percent. "While I'm optimistic about the overseas markets," Mr. Schilt says, "a 17 percent return will complete with any market."
Besides the Japanese market, the fund has some positions in the Australian stock market, which is down about 25 percent this year. However, by not investing in the mineral and resource areas, the fund has avoided some of the carnage that has overtaken some of the more speculative issues.
The Pacific Fund was known until last year as the Nomura Fund, run by Nomura Securities. However, Merrill Lynch, assumed the management of the fund after it had shrunk to half its original size -- a victim of success not failure. As the fund became more succesful, investors redeemed their shares. With Merrill Lynch selling the fund (it's a load fund involving a sales fee), it is now picking up Schilt thinks it will be a $100 million fund.
Tippicanoe and Hobie too. . . . At the end of this month Hobie Cat a subsidiary of Coleman Company (NYSE) will introduce its 33-foot monohull racing/cruising sailboat to the public. Last week the company showd the boat, priced at $29,995, to its dealers and found the dealers as excited as a bunch of kids with new Hobie Cat to play with. One source at the company reports it logged enough orders from its dealers to keep the assembly line humming for at least a year.
Maybe we need more "blue Mondays." After taking a steep dive on Monday morning, the stock market recovered all week. By the close on Friday, the Dow Jones industrial average had posted a 36.72 gain, closing at 860.73. Oil stocks and takeover targets were actively traded and higher.