A Cautious Path For A Tricky Time

With the Dow hovering at 3250, George Keane is getting edgy. The president of the Common Fund in Fairfield, Conn., which manages more than $12 billion for 1,000 U.S. schools, colleges, and universities, hasn't exactly turned bearish. But he thinks the market "has been bid up to an extreme level of valuation."

Keane argues that while an economic recovery is expected soon, corporate earnings aren't likely to show significant growth until 1993. And he worries that interest rates, down to their lowest level in decades, should begin rising again later this year as the recovery gains momentum. Says Keane: "Neither U.S. stocks nor bonds are likely to provide very attractive returns over the next couple of years."

So what's an appropriate investment strategy? Keane has turned quite defensive, buying shares in sectors of the U.S. market that are still depressed, such as the oils and the airlines. He has also switched some funds into markets overseas. Keane thinks Europe, in particular, offers good growth prospects over the next few years as trade and tariff barriers ease in the European Community.

WHO'LL WIN FIRST? In the U.S., Keane expects the oils and the airlines to benefit strongly from an economic recovery. So, he has been buying shares of Chevron and Royal Dutch Petroleum--the majors that he says are still trading at modest price-earnings ratios and paying relatively attractive dividends. Chevron, the largest oil-and-gas producer in the lower 48 states, with huge interests in chemicals and minerals, is trading at 68, with a p-e of 12 and a 4.8% dividend yield. Royal Dutch, which owns 60% of Royal Dutch/Shell Group, is at 84, with a p-e of 12 and a nifty 5% dividend yield.

Among the smaller oils, Keane likes Apache, an oil-and-gas independent that explores the continental U.S., both onshore and offshore. At 15, Apache has a p-e of 21--high compared with those of Chevron and Royal. But Keane says Apache is an attractive long-term play among independents with huge oil and gas reserves.

Among airlines, Keane is particularly high on UAL, parent of United Airlines. It's trading at 150. He believes UAL will climb as high as 200 when the recovery finally takes off.

Since foreign stocks aren't easy for individual investors to get, Keane recommends buying into international stock mutual funds. He likes the "excellent performance records" of T. Rowe Price International Stock Fund, managed by Flemings' ace Martin Wade in London, and Harbor International Fund, managed by another star, Haken Castegren, in Boston.