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But What Have You Done For Us Lately?



Elaine M. Garzarelli had already amassed a huge following on Wall Street when she made the call of the century. Weeks before the October, 1987, stock market crash, the Shearson Lehman Bros. strategist urged her followers to dump their stocks, and days before, she warned that a drop in the Dow Jones industrial average of at least 500 points was imminent. Anyone who heeded her admonition will probably be forever grateful.

But those who've put their money in her hands since then have been sadly disappointed. True, the Shearson Lehman Bros. Sector Analysis Fund, the mutual fund the brokerage firm launched in the summer of 1987 to capitalize on her fame and talent, had a terrific start. Her months-old fund dodged the crash and even made a littlefrom it.

Since then, however, the fund has been a sorry also-ran. Every year, it has underperformed the average U.S. diversified equity fund, and in four of the years, it underperformed the Standard & Poors 500 to boot (table). In the first half of 1993, the fund was barely in the black, while the S&P 500 returned 4.9%. In all, $1,000 invested at the start of 1988 would have been worth $1,405 at the end of June, 1993, compared to $2,122 for the average U.S. fund and $2,190 for the S&P. Not surprisingly, investors have left in droves. From over $700 million in 1988, the fund has dwindled to less than $200 million.

Garzarelli's experience shows that it's a far cry from giving advice to making real-world investment decisions. In February, 1988, the same indicators that screamed "sell" in 1987 turned bullish. But she ignored her computer model and remained in cash. She later traded stocks furiously in a failed effort to catch up. So, while the S&P delivered a 16.6% return in 1988, Garzarelli's fund was a disaster--losing more than 13%. "Trading is not what I do well," she says.

Nor does she pretend to be a stock-picker. Garzarelli's models identify industry groups, or sectors, such as regional banks and newspaper stocks, her two most recent industry picks, which are expected to outperform the market. Her models, however, do not select stocks. She says 80% of her sector picks are profitable. A review of her "Attractive Industry Group" list by Coopers & Lybrand indicates that her industry picks beat the S&P 500 by an average of five percentage points a year. To buy individual stocks for the fund, Garzarelli chooses companies rated No.1 and No.2 by Shearson analysts. Obviously, many of those picks underperformed their groups.

Garzarelli had a chance to redeem herself during the bear market of 1990. Her indicators turned bearish on July 7, when the Dow was just shy of 3000, but her superiors had forbidden her to sell out the fund without their permission. After days of trying to get an O.K., she says: "I was told I could do a little selling but I couldn't go entirely to cash." The fund sank as the Dow slid below 2400 into the fall. That was when her indicators turned bullish again, but her shareholders ended up in the red for 1990 anyway.

"EXORBITANT" PAY. Since then, she has remained steadfastly bullish. She thinks the Dow could reach 4000 by the spring of 1994 and does not foresee a significant market pullback until then.

Fortunately for Garzarelli, the fund is not her main source of income. That comes from commissions paid by institutional investors such as Fidelity Investments, T. Rowe Price, and the College Retirement Equity Fund. She writes voluminous reports and holds conference calls and face-to-face meetings with hundreds of clients every year. She also spends half her time on the road. For this, she says, "the company pays me an exorbitant amount of money"--believed to be in excess of $2 million.

With much of her own money invested in the fund, it's more than a matter of pride to turn it around. Garzarelli, who will remain with Lehman Bros. when Shearson merges with Smith Barney at the end of July, is negotiating with Lehman to set up her own investment management company. That would allow her to buy the fund from Shearson. She would then slash its fees, which drag down performance by eating up more than 2% a year, nearly twice the mutual-fund average. She's also considering cutting costs furtherby forgoing stock-picking and apply-ing her market timing to an S&P index portfolio.

A Garzarelli management unit wouldn't just run one fund. She'd like to manage institutional and retail accounts as well and wants to pursue global investing. "I'm already building computer models for Japan, France, and Germany," she says. Still, the success of those ventures in enlisting new investors will depend on whether she can ride her also-ran fund into the winner's circle.Jeffrey M. Laderman in New York

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