Sowing Seeds At Kemper Growth
Last July 16, six weeks into his job managing Zurich Kemper Investments Inc.'s flagship Kemper Growth Fund, Patrick S. Adams got a taste of real pressure. In the first frenetic hours of trading, the Dow Jones industrial average plunged 167 points. A jittery Adams spent an hour wandering around downtown Chicago. His concentration restored, he acted swiftly. Wagering that the setback was only temporary, he bought 44 stocks just as the market was rebounding. Had he hesitated much longer, "I wouldn't have had a shot at rearranging the portfolio," Adams explains.
Kemper is counting on Adams to revitalize its $2.7 billion Growth Fund, which in recent years has pulled down the firm's equity funds. Under new owner Zurich Insurance Group, Kemper aims to boost retail fund assets from a stagnant $43 billion to $67 billion by 2000--but only with better performance, especially from Adams. "If we're going to change the image of the firm, we need to change the flagship. It's got to be damn good," says Steven H. Reynolds, head of Kemper's equity department since 1995.
RISK-TAKER. The 35-year-old Adams, hired from Denver-based Founders Asset Management, has an impressive record managing smaller funds but has never handled such a big fund. Still, he is already taking chances, turning over more than half of the stocks he inherited. Six of his top 10 holdings are new since his arrival. The Johnson & Johnsons and Monsantos are going over the side in favor of more volatile stocks with smaller capitalizations. From May 31 to Sept. 12, the fund was up 1.15%, vs. -1.74% for all growth funds.
Yet to produce superior results consistently, say previous Kemper Growth managers, Kemper needs to change the firm's bureaucratic approach, which has undermined performance. Even the best ideas had to run a gauntlet of analysts and quantitative models before being added to the approved list. "Too many rules. Too many layers. You need more flexibility," says Beth Cotner, an 11-year Kemper veteran who quit the Growth Fund to join Putnam Investments a year ago. Reynolds defends the restrictions and the current collaborative approach rather than a star system: "The rules and structure were not the problem; it was the portfolio managers," he grouses.
Still, Adams is getting star treatment, and plenty of freedom. Kemper has launched a slick marketing campaign extolling Adams to the financial planners and brokers who sell its load-only funds. He is slated to manage a new "concentrated" growth fund allowing him to take larger positions in single issues. Adams says he has had no trouble acting on his ideas. When La Quinta Inns Inc. stock tumbled recently, Adams bought it despite opposition from Kemper's lodging-industry analyst and a red flag from its quantitative model. Adams credits Reynolds with setting a more flexible tone: "He has broken down the bureaucratic buildup."
LEGWORK. Adams aims for issues with both predictable revenue growth and the potential for upside earnings surprises. He dumped Enron and FMC because of slow growth, and he cut Sandoz and Pfizer because they were too pricey. He has bought beaten-down companies such as Tele-Communications Inc. and Viacom Inc., believing Wall Street will warm to them as results improve. He likes the long-term fundamentals of out-of-favor restaurant chains such as Lone Star Steakhouse and Boston Chicken. Relying on old-fashioned legwork, he is loading up on software engineer Cadence Design Systems Inc. after a three-hour meeting with management convinced him Street earnings estimates were way too low.
It will take "a couple of years," concedes Reynolds, for Kemper Growth to regain its luster. Adams is more optimistic: "Realistically, we can do it sooner than that." Respect could be only a few laps around the Loop away.