In post-'81 slump, some funds content to tread water
New York — Mutual fund managers would prefer to display the kind of double-digit stellar performances many of them achieved last year. But few equity funds have managed to pull ahead in 1982.
As the Dow broke the 800 barrier and headed in a southerly direction through mid-March, fund managers were forced to lower their aims and be satisfied with merely outperforming the averages. Few portfolio managers could wholeheartedly endorse any stock, or find much to cheer about -- at least until interest rates fall significantly. But, with the Dow down about 8 percent since January, and the Standard & Poor's 500 off 11 percent, contends Don Ashe, publisher of the No-load Fund Investor newsletter, ''to be down only 1 percent or 2 percent is good.''
At the Lindner Fund, the top performing no-load fund of 1981 -- with a 34.87 percent gain -- the good news is that the fund lost only 3 cents during the stock market decline in the beginning of March (from $13.17 to $13.13 a share). ''The big bad decline got us to go down a big 3 cents,'' boasts Robert Lang, Lindner's vice-president for investments.
In part, the good performance is due to the St. Louis-based fund's large cash position -- some 60 percent of its assets are currently in cash. But another 15 to 17 percent of Lindner's portfolio right now consists of utility stocks. These include Consolidated Edison, Louisville Gas & Electric, Texas-New Mexico Power Company, and Wisconsin Electric Company. The fund added to these positions in the second half of 1981, and in some instances is still buying. ''Half our utility stocks posted gains and half have remained at purchase price,'' says Mr. Lang, a performance he says he wouldn't mind repeating at any time, not just in today's down market.
But the fund is not particularly interested in market direction, according to Lang. Instead, it keeps a sharp eye on interest rates. ''Essentially,'' he comments, ''we have a formula that when short-term interest rates go up, then stocks have to be extremely cheap to be worth buying.'' And aside from utilities (many of which are expected to get significant rate increases which they can use to retire debt), few stocks seem to be worthwhile in this context.
He muses: ''Most stocks are attractive because they are inflation hedges. Their value grows as the value of their underlying assets grows. But if we are entering a deflationary stage -- which we may be - there are lots of problems.'' For instance, he notes, companies with large unfunded pension liabilities would have gigantic fixed liabilities in real terms. The Lindner Fund, he notes, looks cautiously at the balance sheets of prospective companies, with a special interest in whether they use conservative accounting principles.
Another group Lindner leans toward is bank stocks. ''Bank stocks look cheap, '' Lang says wryly, then adds: ''Then again, maybe they will start looking cheaper.'' And finally, the Lindner Fund made a very recent commitment to Texaco. ''Our observation was that the price of Texaco stock was the same as it was in 1972,'' he declares. ''Essentially, it looks like a case where they have a lot of undervalued assets.''
At the Vanguard Group, president John Bogle presided over two strong funds last year: the Explorer Fund and the more conservative Windsor Fund, which rose 16.8 percent in 1981, compared with a fall of 4.9 percent for the S&P 500. While Mr. Bogle does not pretend to have second sight about the direction of the market, he believes that ''it is a little more rational to predict that the market will be up by the end of this year.''
The Windsor Fund is a ''contrarian'' fund, emphasizing stocks that have been undervalued by the market in general with low price/earnings ratios and high yields. For the first 2 1/2 months of 1982, Windsor Fund was down 6 percent (compared with the S&P drop of 10 percent). Currently, the fund is only 3 percent invested in cash, 97 percent in equities.
During the past quarter, Windsor Fund has placed part of its $900 million in assets in natural gas stocks - on the belief that it may be decontrolled; oil drilling stocks, which are currently extremely depressed; additions to its already large regional bank positions, because price/earnings (p/e) ratios have been driven to extremely low levels; and food stocks.
In the banking areas, says Bogle, Windsor Fund holds some 20 regional banks in ''good-size cities, where we look for most of them to earn more money this year than they did last year.'' In part, this will be as a result of high interest rates. Included among the fund's larger positions are Ameritrust in Cleveland, First Interstate Bancorp of Los Angeles, First National Bank of Boston, and Philadelphia National Bank.
In the food processing area, the Windsor Fund owns giant Dart & Kraft, the newly merged food and consumer products company, which it picked up at a relatively low p/e of 6, and General Foods, which sold at a p/e of 5.
''These are good consumer stocks that won't be affected too much by any kind of recession,'' Bogle maintains.
He says the oil and oil service stocks are attractive because ''they were selling probably on the average of 15 times earnings a year and a half ago, and now many of them are selling at five times earnings. That is a big difference.'' While he doesn't expect them to post major gains this year, he feels Windsor paid a reasonable price for a decent earnings growth rate over time. Among Windsor's choices in the oil stocks, he says, are Exxon and Royal Dutch/Shell. ''Something like Royal Dutch/Shell is selling at three times what we expect this year's earnings to be. Exxon is four times this year's earnings.''
Unlike those who predict dire problems for the oils as the price per barrel keeps falling, Bogle asserts, ''We see oil stocks as having a normal growth pattern of 8 percent or 9 percent a year - or slightly less than that.'' Some 15 or 16 percent of Windsor's holdings are in oils, which it has been buying since mid-1981.
The Sequoia Fund, a $135 million growth fund that made an impressive 21 percent gain last year, has so far fallen only 2 percent this year. But to maintain this performance, says Robert Goldfarb, a vice-president and one of the firm's portfolio managers, Sequoia bought long-term bonds for the first time in its history.
''With interest rates greater than 17 percent for GNMAs (Government National Mortgage Association bonds),'' Mr. Goldfarb says, ''and the protection of government guarantees, we felt we couldn't pass them up.'' Sequoia has also kept a substantial amount of its assets in cash. ''Our criterion for buying stocks is the bond return,'' Goldfarb says. ''Sequoia likes an inverse ratio of stock p/e and bond yield.'' In other words, if a bond yields 16 1/2 percent, a stock would have to sell at a p/e of 6 to be attractive.'
'Since oil and gas and technology stocks are on their backs, they may be the next good buys,'' he says. But Sequoia will avoid them, he says, as it did during the oil and gas craze of 1979 and '80, because they are just not the fund's style.
''They are capital intensive and commodity plays,'' he explains. ''We like companies with very high returns on capital and low capital intensity. At Sequoia, we feel that earnings are real when they wind up as cash and are not real when they wind up as plant and equipment. We want to go into businesses also having price flexibility - like Gillette.''
So far this year, Sequoia has made no new commitments. But it has added to some of its old holdings. For instance, it bought additional shares of DuPlan Products, which produces business forms; Interpublic Group, the advertising company; Meredith Corporation, which owns some TV stations; and Better Homes & Gardens magazine.