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How funds handle change
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May 13, 1999: 7:25 a.m. ET
Some funds stick to their style, while others search for better returns
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NEW YORK (CNNfn) - A long, dark winter for value stocks is only just beginning to thaw, but manager Peter Langerman says he never considered changing his investment style to chase the popular trends on Wall Street.
Even as Franklin Mutual Series Fund Inc. faced redemptions and lackluster returns, the fund family remained faithful to beaten down value stocks, he said recently.
"Were we tempted to change our style? No," said Langerman, who is also chief executive at Franklin Mutual Advisers. "We can control the things we own and the things we're buying and selling …We believe in our approach and we see no reason to change it."
In search of better returns
The U.S. stock market may have its ups and downs, but change in investing styles at mutual funds is rarely dramatic, industry pros say. Rather, a small-cap manager may creep into mid-cap stocks, or a value fund will be flexible enough to own hot names such as America Online (AOL).
"These things tend to be done out of weakness," said Sheldon Jacob, editor of the newsletter No-Load Investor. "I would tend to think the odds are in favor of these moves."
In one dramatic case, American Century Ultra Fund went from a small-cap fund in the 1980s to a mid-cap fund in the early 1990s to a giant large-cap growth fund today, said Scott Cooley, an analyst at Morningstar, a Chicago fund researcher.
"A lot of the pressure has been brought on managers by the fund companies themselves," Cooley said. "They create unrealistic expectations."
While there aren't any statistics, there is anecdotal evidence that shows change can pay off. Fund giant Fidelity Investments, for example, has seen its returns soar after focusing more on large-cap growth names.
Formal announcements about changes aren't that common, however.
Some new changes
Baron Funds said recently its Baron Growth and Income Fund was changing to become the Baron Growth Fund. The shift means the fund will drop its secondary "income" focus of convertible securities and Real Estate Investment Trusts (REITs) to concentrate on growth stocks, said Morty Schaja, chief operating officer at Baron.
Practically speaking, it means the fund will focus on smaller companies, Schaja said.
"Our shareholders requested it," Schaja said. "We're seeing so many more opportunities in the small-cap universe than in income-oriented investments."
In another recent case, Stein Roe & Farnam announced changes at two funds effective May 6.
The Stein Roe Special Fund, which had focused on "deep value" stocks, was renamed Stein Roe Disciplined Stock Fund and plans to invest in a blend of mid-cap growth and value stocks, said company spokeswoman Marilyn Morrison.
"We're not really a value shop," Morrison explained. The Special fund had been facing redemptions for months and the company decided to take strong action before losing more investors, she said.
The Stein Growth Opportunities Fund also changed its name to Stein Roe Mid Cap Growth Fund. In this case, the fund will change its focus from "multi-cap" growth stocks of any size to mid-cap growth stocks.
"Performance is everything," Morrison said. "This represents making some tough decisions on our product line …and ensuring our investors won't go elsewhere."
By some industry estimates, investors will only give a fund a year before they'll give up on bad performers, Morrison said.
"Mutual fund companies don't have the luxury of time to allow funds to underperform," Morrison said.
A long-term strategy
Langerman, of Franklin Mutual Series Fund, declined to comment about redemptions at the fleet of six funds.
The portfolio cut almost in half the number of stocks to focus on their best ideas, but Langerman said this isn't a shift in style. Cooley and Jacob agree.
"That was paring the number of positions that were small positions," Langerman said. "We're focusing on big positions and focusing on where our money will have the best impact."
The funds have an "eclectic" investing strategy that includes finding stocks that may become takeover targets and companies in bankruptcy reorganization that are poised for a big turnaround, Langerman said.
Langerman pointed out several stock buys over the years that have paid off in the "hundreds of millions of dollars." For example, the portfolio for years has owned cable company darling MediaOne (UMG), which recently accepted a $58 billion buyout offer from AT&T (T).
The portfolios also owned a stake in Canary Wharf, a London real estate developer that that went bankrupt in the 1980s but has since ridden the wave of a strong real estate market to an IPO.
"These stocks are home runs," Langerman said. "People can choose what they want to do with their money. If they understand what we're about and what our objectives are, they're comfortable with what we do and our long-term objectives."
-- by staff writer Martine Costello
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