So Who Needs Cyclicals?

Veteran manager Charles Albers is betting the sector will stall

Veteran fund manager Charles E. Albers works with a degree of freedom that competitors would give their eyeteeth for. Most mutual-fund companies box their managers into buying stocks that fit certain parameters, such as large-capitalization value, small-cap growth, or just plain mid-caps. But Albers' $16 billion Oppenheimer Main Street Growth & Income Fund has no such limits. So is Albers buying cyclicals, the market's new darlings?

Not a chance. He believes the current surge in the economically sensitive stocks will fizzle. And in recent weeks, while many fund managers snapped up cyclicals, Albers took some profits in energy, commodity, and a few financial stocks. His analysis shows that the better-than-expected first-quarter earnings are not the beginning of a widespread revival in corporate profits. "World GDP growth was 2.1% last year and will likely be only 2% this year," says Albers. "So competition remains tough and margins are under pressure." Albers took advantage of price weakness in large-cap growth stocks to add to his stakes in such companies as Wal-Mart Stores, Intel, and Merck (table).

"WORTHLESS" FADS. Whether the move is a moneymaker remains to be seen. So far this year, the fund's A shares, the largest share class, are up just 8.3%, vs. 10.9% for the Standard & Poor's 500-stock index and 18% for the Dow Jones industrial average (through Apr. 27). Albers' long-term record is top-notch. His former fund, Guardian Park Avenue Fund, under his 26-year reign, had a 17.2% average annual return. During that time, the annual gain for the S&P was 13.5%, while the Lipper U.S. Growth Fund Average was 12.6%.

Albers retired from Guardian early last year and, with longtime associate Nikolaos D. Monoyios, moved to Oppenheimer. In his first 12 months, Main Street gained 16.9%, vs. a mere 3.7% for the average U.S. diversified fund. The fund, sold with a load through brokers and financial planners, has become a best-seller for Oppenheimer, pulling in nearly $2 billion so far this year.

Besides being one of the longest-tenured fund managers, Albers is one of the first to use quantitative techniques. The 58-year-old New Yorker, who had once studied to become an economics professor, applied his statistical and econometric skills to investing. After getting an MBA from Columbia University, he eventually landed at Guardian, where he built computer-run models--then run on big mainframes--to help select stocks. He has never been one for schmoozing with CEOs. "Much too self-serving," says the soft-spoken Albers. "Let the numbers tell the story."

He puts his universe of 2,000 stocks through the statistical wringer every month, looking for patterns that might help identify stocks to buy or dump. When he started, Albers screened for three factors--the estimated present value of future earnings, earnings momentum, and the buys and sells of corporate insiders. "Insider trading worked well until the mid-1980s," he says. "Then, everybody was looking at it, and the information was worthless."

NO MAGIC BULLET. About ten years ago, Albers and Monoyios found that stocks of companies that were doing secondary share offerings started to perform poorly not long after the deals. They incorporated that into their models, but a few years later, academics started publishing research on the phenomenon and it became less effective. "You always have to be on the hunt for new factors," says Albers. No single factor is a magic bullet, and he looks at 50 and weights them differently in his decisions as their predictive power waxes and wanes. Says longtime fund analyst A. Michael Lipper of Lipper Inc.: "Chuck and Nikos have a rare combination of being able to run quant screens and know how to analytically prune them."

For a manager with such a long record, Albers has a surprisingly short time horizon. He's looking out three months--and makes small but frequent adjustments to keep the portfolio in line with his expectations.

Longer-term, Albers expects that small caps will outperform the large caps, leaving the S&P 500 in the dust. But for now, he's buying the large-cap growth stocks because their earnings will hold up in an era in which corporate profits will be hard to come by. Considering Albers' track record, his market calls should not be taken lightly.

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