On the morning of Sept. 11, US mutual-fund managers suddenly saw their world shattered. Beyond dealing with the immediate shock and anguish over those lost in the terrorist attack on the twin towers, they had a practical decision to make: Should they keep their existing portfolios intact, or seek safety in cash?
If they did the latter, they could run up against a new US Securities and Exchange Commission rule that instructs funds to keep at least 80 percent of their assets invested in companies that correspond to the nature of their fund.
So if they run large-cap funds, for example, they must typically maintain 80 percent of their portfolios in large-company stocks.
While some stock-fund managers reportedly increased their cash positions, anticipating a sell-off by fund holders, few large-scale redemptions have occurred, according to the Investment Company Institute in Washington.
In fact, anecdotal evidence suggests that just as many individual investors are holding the line with their investments, so too are portfolio managers. Most equity funds appear to remain heavily invested in stocks - with very small cash holdings. In other words, fund managers are showing no sign of panic. (The big sellers just after the attacks were large institutional investors, such as brokerage houses and pension funds.)
Here's how three fund managers - in funds that invest in three different categories of firms - are dealing with the current crisis:
Manager, Waddell & Reed Advisors Core Fund
In a crisis situation, Jim Wineland says it's best to "let things settle down, let the smoke clear," before making major changes to a fund's portfolio.
Currently, Mr. Wineland has a whopping 98 percent of his fund's assets in equities, including 5.5 percent in non-US companies. Cash holdings are a mere 2 percent of assets. The fund, with assets of $6 billion, holds no bonds.
Even before Sept. 11, Wineland had been rethinking his strategy, given the market's increasing softness and talk of possible recession in the US. "But our focus then, as now, was on finding companies that have earnings stability and strength," he says.
That focus, he says, has not changed. Before Sept. 11, Wineland had strong positions in defensive stocks, including pharmaceutical firms, healthcare companies, and financial services.
He was also invested in selected military stocks, notably Lockheed, which by Sept. 11 was his fund's 10th largest holding.
The Overland Park, Kan.-based Wineland does not see himself increasing his position in Lockheed, nor moving to a larger cash position. He says he feels this is a good time to be fully invested - that the market will eventually rebound as it has after prior downturns, including the large market drop in late 1987.
But Wineland, who has 65 stocks in his current portfolio, is intrigued by certain buying opportunities. Example: Walt Disney. The stock price has plummeted. Yet, he says, "the diversified businesses comprising Disney" - films, theme parks, resorts - "look promising."
He's also intrigued by domestic energy companies. He already has several major firms. So does he add more to his position? That one, he says with a laugh, is something he's still chewing over.
Manager, Seligman Capital Fund
After the initial shock of the Sept. 11 attack, Marion Schultheis sat down to ask herself what impact terrorism would have on the overall economy and her fund, and which sectors would be affected most.
Her conclusion: The economic recovery "will be delayed by two quarters" - from late this year to the third and fourth quarters of 2002.
As for sectors, Ms. Schultheis says before Sept. 11, her fund, with assets of over $500 million, was positioned for an economic recovery. She was overweighted in consumer cyclicals such as Abercrombie & Fitch, Smithfield Foods, and Jones Apparel. She also was about to move into more industrial stocks and - a little later - technology.
But Sept. 11 changed her assessment. She now hangs tough with consumer cyclicals, though she has trimmed it a tad, increased her position in healthcare, and plans to wait until next year to invest in industrials and technology.
Schultheis, based in New York, holds some 60 companies in her portfolio. With 95 percent of the fund's assets in stocks, she considers herself almost fully invested. She is not adding to cash, nor does she intend to. While she anticipates that corporate earnings will be worse than expected for the rest of 2001, she predicts a rally in 2002 and a solid year in 2003.
To gain from consumer cyclical stocks, she says, "you have to be invested now." To profit from tech, you have to be aboard by early 2002.
Finally, Schultheis says she really likes biotechnology. Her decision, she says, has absolutely nothing to do with Sept. 11, and shows, she says, how even a global crisis may not affect all stock sectors. The biotech industry stands on its own and has a solid future, she says.
John Rogers Jr.
Manager, Ariel Fund
When he first saw the terrible events at the World Trade Center on television, John Rogers Jr. worried about his own employees. Ariel Capital Management Inc., which he heads up, is in a skyscraper in Chicago. So Mr. Rogers had his staff evacuated.
The next day, however, he started rethinking his overall portfolio strategy for the Ariel Fund, a small-cap value fund with more than $400 million in assets.
He decided that because of falling share prices and low valuations, it was time not to sell - but to buy. Rogers is a great believer in hanging on to value stocks, no matter how difficult economic conditions get. Value stocks, to begin with, have built in "defensive positions" for economic difficulties, he says. Over time, Rogers has kept his portfolio highly manageable, carrying 35 or so companies.
Following Sept. 11, his cash position has actually gone down, from 11 percent on Sept. 10, to about 3 percent now. Currently, his equity stake is at 97 percent.
He sees nothing that could change that heavy commitment to stocks at this time.
Rogers has just added two new companies to his portfolio: an urban-oriented radio chain, plus a company that makes slot machines. Both purchases were based on a perception that Americans would continue to seek out leisure products - in part, for a sense of escape from news about military buildups and possible conflict.
Small-cap value has been the big winner for the stock market this year, and the Ariel Fund has profited enormously, one of the best performing funds out of all stock funds. Rogers is convinced that the small-cap-value category will continue to be the champ of the mutual fund field.
"Small stocks are very cheap, relative to both mid- and large-cap stocks," he says.
That means funds like his are well positioned for whatever occurs within the broader US economy and stock market, he says.