Investors looking for growth once flocked to American Century Ultra Fund, while those wanting solid value chose Neuberger Berman Guardian. With low expenses, no loads, admirable records, and seasoned managers, both funds seemed smart choices. But in the mid-'90s, each fell behind, trailing not just the Standard & Poor's 500-stock index but similar funds as well. This year, however, both are performing well. BUSINESS WEEK Senior Writer Robert Barker explains why:
FOCUSING ON FRONT-RUNNERS
With assets of more than $33 billion, American Century Ultra is the nation's seventh-largest stock fund. Its performance this year and last is putting a crimp in critics' contention that big can't be good. Up 34.6% in 1998, it outpaced the S&P 500 by almost six points and is nearly three percentage points ahead this year, with a 10.9% return through Apr. 15.
John Sykora, who joined co-managers Bruce Wimberly and James Stowers III in September, 1997, says the team has been placing larger bets on companies whose earnings are expected to accelerate well into the future. The key attributes: expanding shares of improving markets, high and growing returns on capital, increasing cash flows, and pricing power. "We're looking for businesses that, over time, can sustain their competitive advantage," Sykora says.
As a result, the fund has been focusing more money on favorite stocks. In the past, if the Ultra team saw that computer-networking companies such as Cisco Systems and 3Com were booming, it might have invested in both. Lately, it has been asking which company is better and concentrating on one stock--in this case, Cisco. "Today, we'd say, `Let's look out five years. Which company will dominate?"' Sykora says.
Cisco remains one of Ultra's top holdings, as do MCI WorldCom and AT&T. It picked up the AT&T stake when an earlier holding, Tele-Communications, merged into the big telecom company. Viewing AT&T as a growth stock is controversial, Sykora concedes, but adds that the benefits of the Tele-Communications deal will begin to show up in the bottom line next year. Sykora also is high on Time Warner, which just posted surprisingly good results. "Business is phenomenal," says Sykora, who thinks the media company's return on capital, now around 9%, will hit at least 13% in the next three to five years as interest expenses decline.
WINNING WITH MERGER STOCKS
Fifty years old next year, Neuberger Berman Guardian seemed to be showing its age, having failed since 1994 to finish in the upper half of its class of large-cap, value-stock funds. Last year it returned a pitiable 2.4%, leading Morningstar to conclude that it "looked to be a sinking ship."
Then, last September, Rick White jumped from Salomon Smith Barney to join Kevin Risen at Guardian's helm. Swiftly, the pair set about revising the portfolio. Through Apr. 15, the fund had gained 6.9%--behind the S&P 500 by about a point, but enough to put it in the 26th percentile among its peer group. Fueling performance has been big holdings in stocks targeted in mergers, including Mobil, AirTouch Communications, LucasVarity, and BankBoston. "I'm exceedingly pleased," says White.
He also expects to benefit from the fund's contrarian picks--notably WellPoint Health Networks, PacifiCare, and Aetna among health-maintenance organizations, "a sector people love to hate." Guardian is counting on the underwriters' growing pricing power and expects Aetna will surprise the market with better-than-expected earnings flowing from its purchase of Prudential's health insurance business. Another area Guardian has been prospecting in is the oil sector. It owns Texaco and has a small position in Amerada Hess.
White says he and Risen have been looking for strength among consumer cyclicals, one reason for Guardian's large holding in General Motors. GM may benefit if the market's recent preference for cyclical over growth stocks persists. "Is this a little value-stock rally, or is the market discounting the fact that global GDP is looking stronger?" White wonders. "I don't know, but I'll take whatever comes our way."