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Research is key to funds
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September 23, 1999: 10:44 a.m. ET
Managers say fact-finding teams are crucial to successful stock picking
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Thanks to solid research, fund manager Steven Reid started buying software maker Symantec Corp. at $10 a share, long before Wall Street noticed and the stock soared to about $33.
You might think the manager does all the work at a mutual fund, but Reid, of the Oakmark Small Cap Fund, says an experienced research team is crucial.
"Researchers are people with industry experience and good Rolodexes," Reid said. "They've made mistakes along the way -- with other people's money -- and they've learned something."
The Oakmark fund, with $526 million in assets, is off 3.7 percent as of Aug. 31, according to Chicago fund-tracker Morningstar. While the fund's investing style is out of favor, it earned around 40 percent a year in both 1996 and 1997, and Morningstar calls it a "worthy long-term holding."
Symantec (SYMC) represents about 5.75 percent of the portfolio.
Most people probably don't realize the importance of strong research behind a fund's performance, said Russ Kinnel, a senior analyst at Morningstar.
"Many investors probably don't realize how much of a difference there is in research at different shops," Kinnel said. "It's an under-appreciated part of the business, but it's the heart and soul of it."
With the exception of index funds and quantitative, or "quant," funds that use computer models to pick stocks, the way a mutual fund does its homework varies as much as the industry itself.
Some fund companies have elaborate staffs of researchers for different sectors of the market, while at smaller shops the manager does all of the work himself.
"The larger fund groups all have research analysts," said Sheldon Jacob, editor of the investing newsletter No-Load Fund Investor. "You can't just take what the company hands you."
At the top of the list would be fund giants such as Fidelity Investments, American Funds and Putnam Funds, Kinnel said. Some smaller shops, such as Davis Funds and Longleaf Partners, compensate by having more concentrated portfolios, highly skilled managers and a few bright analysts, he said.
"Too often people don't realize that a fund company has this huge team of super-brainy analysts supporting a fund, whereas another fund might be only one or two people," Kinnel said.
Managers who don't have a good team behind them sometimes get stuck with the same Wall Street research that everybody else uses, Kinnel said.
"You're using research that a lot of other people have seen," Kinnel said. Plus, that data might be overly positive to encourage buying.
But some managers, including Alex Cheung of the Monument Internet Fund, prefer to do all of the background work.
The Monument fund, with $47 million in assets, is up 82.8 percent year to date as of Aug. 31, according to Morningstar.
Cheung talks to brokers and analysts, does company visits, and goes to trade shows and conferences. The work puts him on the road about 65 percent of his time.
"Every source of information comes from a different vested interest," Cheung said, in explaining his desire to do his own homework. "Usually there's a bias built into that information."
Reuben Brewer, manager of mutual fund research at Value Line Inc., said it's more likely that the managers of small funds will do their own research, while an international fund will almost certainly have a staff of analysts.
"One would hope that analysis would play a huge role in a manager's decision," Brewer said. "But to what extent they use an analyst would be specific to the managers."
Sevgi Ipek, co-manager of the Citizens Global Equity Fund, said she meets every day at 9 a.m. for about 30 minutes with her research team.
The fund, with $97 million in assets, invests in Europe, Japan and the United States, according to Morningstar. The fund is up 15.5 percent year to date as of Aug. 31, Morningstar said.
"We invest in many countries so it's very important for us to take a top-down, macro-economic approach before we look at the companies," Ipek said.
Good research led the Citizens fund to overweight Italy and Spain in 1998 when markets assumed those countries wouldn't be part of the European Monetary Union, Ipek said. The fund earned 32 percent that year.
And in the first quarter of 1999, Citizens analysts predicted Japan's economy would turn around, and that companies would need help with software and Y2K planning, Ipek said.
That led Ipek to stocks such as software maker Softbank. Ipek started buying the stock at about 13,000 yen, or roughly $124, and it is now trading around 40,000 yen, or about $382.
"It resulted in very strong gains for us," Ipek said.
Reid, of Oakmark, said he was a research analyst before becoming a manager during his 19 years at the company. Another Oakmark manager, Bill Nygren, was director of research. Reid said the exchange of ideas at the fund company between managers and analysts happens on many different levels.
"The ideas come much more from the qualitative side than the quantitative side," Reid said. "It's keeping your eyes open. We're not ones to follow the herd in investing." 
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