Four Pros Took The $100,000 Challenge. Two PassedGeoffrey Smith
At the beginning of the year, BUSINESS WEEK invited four top money managers to invest a mythical $100,000 in 10 stocks for one year. Only one of the managers, John R. Horseman of the GAM International fund in London, beat the market decisively, racking up a return of 21.2% excluding dividends, vs. the Standard & Poor's 500's 16.6%. The other winner edged out the market with a 16.9% record. All of the results are of June 5.
Horseman, who is British, did well not only with his non-U.S. stocks, which generally lagged the U.S. market, but with his U.S. picks as well. The other three pros, all Americans who focused mainly on U.S. stocks, which had a big run, did a good deal less well. Horseman's three U.S. stocks--McDonald's, Coca-Cola, and an obscure thrift called Queens County Bancorp--were up an average of 27%. Horseman scored in China, with Shanghai Petrochemical up 30.6%, and with two big Dutch companies, telephone and postal service company KPN, and Fortis Amev, a bank and insurer-- up 42% and 32%, respectively. The falling dollar sharply boosted his returns: In their native currencies, Horseman's Dutch and French picks rose about 7.9%, but after taking the dollar into account, they were up 29%. His only blunder was Canon in Japan, down 7.6%.
PLAYING MONOPOLY. Horseman, who declined to be interviewed, said in a written statement that his top pick for the second half is Singapore Press Holdings, already up 12.5% in the first half. It has a monopoly on Singapore's newspapers, and Horseman thinks it will benefit from a strong Singapore dollar, rising ad revenues, and stable paper prices.
What most hurt the American managers was their generally defensive approach to the market. Two of the managers in particular believed that the four-year bull market and the economy had run out of steam. "The move in the first half surprised me," says John R. Gardner, who manages institutional money at Van Liew Capital in Providence. Justin S. Mazzon, a big-cap specialist with American Blue Chip Investment Management Inc. in Larkspur, Calif., expected the market to stay flat all year, causing him to search out stocks with good dividends. Mazzon and Gardner correctly bought into some big-cap consumer stocks, but they missed the technology rally. Ironically, Horseman had predicted an "uninspiring" market for U.S. stocks this year. But that prediction didn't stop him from choosing issues wisely.
The fourth investor, Douglas Johnson, until recently a fund manager with Safeco Mutual Funds in Seattle, favored down-and-out issues that generally performed well. But he bought one Mexican stock that got hammered by the peso crisis and had two other substantial losers.
Mazzon was the runner-up, with a 16.9% gain. Dividends added another 1.6%. He concentrated on big-cap stocks, putting 75% of his money into Chevron, Eastman Kodak, 3M, and Sears Roebuck, which were up an average of 21.6%, and Woolworth, which was up just 8.1%. Toys `R' Us Inc. dragged his results down by dropping 24%. But Mazzon believes it will recover in the second half, as a new generation of video games begins to perk up sales. His top pick for the second half is Sears: Although it has jumped 27% this year, Mazzon thinks shareholders will benefit if Sears spins off its Allstate subsidiary to them. He thinks Allstate shares could jump 20% more to $35-$36 a share by the end of the year.
Gardner, the most cautious manager in the group, gained 14.6%. He earned another 1.1% from dividends, which he sought because of his bearish outlook. Gardner picked companies laden with cash in anticipation of a recession. While cash-rich gold-mining companies Placer Dome and Fluor performed admirably, his high-tech stocks--Newbridge Systems, Motorola, and British cellular phone company Vodaphone--missed that industry's boom.
Gardner was also saddled with a real estate investment trust, Equity Residential Properties Trust, which earned a handsome dividend but barely budged. Another poor pick was Integrated Health Services, which fell 2.5%. That was a relatively modest loss, considering that nursing home company shares plummeted early in the year after reports of accounting irregularities. Gardner, who says concerns about the company's finances are overblown, rates it his top pick for the second half. Earnings are still growing about 25% annually. He is worried that his biggest gainer--Walt Disney Co., up 31.8%--has topped out, and he has trimmed his position in the stock. "I wouldn't hesitate to take gains," he says.
SABOTAGED. Johnson, who assembled a group of down-and-out stocks without worrying about dividends, ended the first half with a mere 6.9% gain. His profits in biotech giant Genzyme Corp. and machine-tool company Giddings & Lewis Inc. were blown out by Grupo Televisa, which plummeted 57%. He bet on Callaway, the golf-club company, which sagged 15.5%, and private-label clothing maker Paragon Trade Brands Inc., which fell 17.4%. Johnson couldn't comment on any specific stocks because he is preparing to launch a new fund for Smith Barney Inc. that is still in registration.
All four investors have widely different second-half outlooks. Horseman expects U.S. and European interest rates to decline as their economies slow, making stocks with good earnings growth attractive. Johnson thinks opportunities remain despite the market's big gains. He likes several beat up sectors, including retailers, HMOs, and cable-TV companies. Mazzon is worried about a sharp short-term correction, but believes the market will end the year near recent levels.
Gardner, still the most pessimistic, questions whether the first half's boom can be sustained. "With so much good news already out, what's going to cause an encore?" he says. The BUSINESS WEEK investors who asked the same thing at the beginning of 1995 wound up lagging behind the market. It's possible their skepticism could cost them again in the second half.