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Fund pros do as you don't do
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May 4, 1999: 4:27 p.m. ET
Morningstar conference shows the chasm between managers and small investors
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CHICAGO (CNNfn) - When a good stock takes a dive they buy more of it. They hold stocks for years. They love small caps and avoid Internet stocks like the plague.
Amateurs? No, they are some of the top pros on Wall Street, and they are doing exactly what small investors aren't.
"There's always been damn fool investors," said Ralph Wanger, manager of the $3.5 billion Acorn Fund who has 40 years of experience. "You want to go where the value is. Buying stocks is like buying groceries."
About 1,000 managers and investing professionals are attending fund-researcher Morningstar's 11th annual conference today and Wednesday in Chicago.
While the topics at the sessions range from value stocks to technology, a recurring theme at the conference has been the stark differences between what fund managers' and small investors' approaches to the market.
Wanger said he's amazed at the great opportunities, overlooked by virtually all retail investors, in small cap stocks.
"I've got news for everybody - small cap is not dead," he deadpanned during one presentation.
Wanger won't touch the large cap stocks that are the sweethearts of Wall Street these days, but he likes Harley-Davidson (HDI). Other top holdings as of March 31 are Carnival (CCL), Selectron (SLR) and Lincare Holdings (LNCR). His only Internet play is SoftBank, a Japanese Internet company.
"These days, you've got day traders working from home, auto mechanics and grad students, who think they have it figured out," Wanger said. "In the past, these (types of trends) have ended badly."
Scott Black, manager of the Kobren Delphi Value Fund, just shook his head about high-flying Internet stocks. The fund, launched in December 1998, includes many small- and mid-cap value stocks and is up 10.4 percent year-to-date as of Monday.
"These Internet stocks are lunacy," Black said. "A lot of individual investors have been lulled into a false sense of security and it's going to come crashing down on them."
Even some technology funds are staying away from Internet stocks. Paul Wick, manager of the $5.6 billion Seligman Communications & Information Fund, said he's played the Internet more successfully by buying stakes in private companies.
For example, the fund invested $5 million in iVillage (IVIL) in late 1998 when the company was still private. In six months, the investment was worth $40 million. Likewise, the fund invested $2 million in Inktomi (INKT) before the company's IPO. The fund sold its stake for $45 million.
"In our opinion it is an Internet bubble and the valuations are ludicrous," Wick said.
Black's fund likes undervalued companies such as LSI Logic (LSI), IPC Holdings (IPCR) and First Essex (FESX), a regional bank in Massachusetts.
Another manager, Ron Baron, said his $6 billion Baron Asset Fund has owned Charles Schwab (SCH) since 1992. The stake has increased in value 50 times - and he sees even more potential in the next eight to ten years.
"When I was younger I thought you had to buy and sell a lot to make money," Baron said.
When Schwab's stock fell last year, Baron even increased the holding by 50 percent.
"I bought as much as I could buy," he said. "Even though we've made tremendous amounts of money, I think it will grow even more." 
-- by staff writer Martine Costello
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