The View from the Top

This year's most successful domestic equity fund managers stuck with the tried and true: buying on dips and focusing on company fundamentals

Traditional values may still apply, after all.

Americans may have been shaken by last month's terrorist attacks, but successful investors still follow such long-standing strategies as buying on dips and focusing on company fundamentals, say managers of many of the best performing domestic equity funds this year.

Domestic equity funds have fallen widely in the wake of the September 11 terrorist attack, as seen in the averages for the main domestic style categories, all in negative territory, ranging from a 33.3% loss for mid-cap growth to a 2.2% drop for small-cap value. Continuing last year's trend, value portfolios are holding up better than their growth and blend counterparts. Rosanne Pane, S&P mutual fund strategist, notes that defensive segments, such as food, tobacco and pharmaceuticals, have moderated declines for value funds. Mid-cap and small-cap value funds showed the lowest year-to-date declines because they tend to hold stocks that have low valuation and defensive characteristics, Pane said.

"While political and military activities will have a great impact on the market in the short term, investors should stay with their long-term investment strategies," said Pane. Fund performance this year may be dismal, as seen in the 22.7% plunge of the average fund, but Pane expects Federal Reserve's rate cuts and the government's tax cuts to recharge the economy early next year.


  Despite forecasts that politics will dominate the market, Bill Nygrin, manager of Oakmark Select Fund (OAKLX ), argues, "I have a hard time believing that in several years, consumers won't spend more and airline travel won't return to pre-attack levels." Like fans of Internet stocks who said earnings and book values didn't matter, "every few years, investors come up with reasons why traditional values don't work," Nygrin said. His fund, with an S&P rank of 5 STARS, is up 16.4% year-to-date.

Nygrin attributes this year's success to avoiding the tech sector rather than to quick shifts related to the terrorist attacks. He acknowledges that his fund has lost more than 10% since September 11, but he doesn't think the long-term business prospects of his holdings have fallen significantly. On the plus side, he points to such strong holdings as H&R Block (HRB ), up 98.5% this year, and Office Depot (ODP ), up 97.2% this year.

Mark Boyar, manager of Boyar Value Fund (BOYAX ), up 6.3% year-to-date, is also optimistic, believing that markets correct after debacles like the recent terrorist attack or the 1973-74 downturn, the worst bear market in his experience. Pointing to the 37% surge in 1975, Boyar thinks the market will also rebound next year when the economy responds to monetary and fiscal stimuli. Over the long-term, both Boyar and Nygrin believe that stocks will outperform bonds or cash.

A nice surprise amid the recent gloom for Boyar is "finding values we haven't seen in a decade." Bargain hunting, he's picked up MGM Mirage (MGG ), J.P. Morgan Chase & Co. (JPM ), Walt Disney Co. (DIS ), and AOL Time Warner (AOL ). Boyar favors entertainment stocks because he thinks people will go to more movies and listen to more music.


  Industry leaders may be in the best position to reap some benefits in the current downturn, forecasts Bob Millen, a manager of Jensen Portfolio (JENSX ), which is off 9.3% year-to-date. In weak economies, Millen predicts companies with competitive advantages are better positioned to buy other companies and strengthen their operations. Gary Hibler, co-manager of Jensen Portfolio, admits he has "a difficult time knowing what the market will do," but he's seen "some real buying opportunities" in the last 30 days. Industry leaders in the Jensen Portfolio include Merck & Co. (MRK ), General Electric (GE ), Automatic Data Processing (ADP ), and Stryker Corp. (SYK ).

Sean Reidy, manager of Olstein Financial Alert Fund/C (OFALX) , believes companies with excess cash flow are "better able to weather the turbulent times." With high cash flow, companies don't have to alter their short-term plans, Reidy reasons. Olstein Financial is the second-best performing large-cap growth fund this year, off just 5.9%.

Saying he's made "no changes" in response to the terrorist attacks, Reidy has stuck with companies offering the prospect of sizable cash flow for three to five years. Reidy feels his long-term approach gives him "the luxury to wait for things to turn around." Olstein Financial's biggest gainers this year have been Furniture Brands (FBN ), Emerson Electric (EMR ), Philip Morris (MO ), and International Rectifier (IRF ).

From Standard & Poor's FundAdvisor

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