"We Saved Our Shareholders About $1 Billion"

Foster Friess explains the philosophy that has helped his Brandywine Fund escape the tech-stock slaughter relatively unscathed

By Robert Barker

In most every business, knowing the right people to call for up-to-date information is usually the difference between luck and true success. And in growth-stock investing, one of the best Rolodexes belongs to Foster Friess, longtime manager of Brandywine Fund (BRWIX ).

The database of business contacts at Friess's $7.5 billion firm includes more than 4,000 names. The 34 researchers at Friess Associates spend a lot of time calling these businesspeople, checking and cross-checking business conditions, and sharing what they're hearing on an inhouse electronic bulletin board.

At the same time, 61-year-old Friess devotes a lot of energy to staying close to corporate executives, often on the golf course. This intelligence network paid off especially well over the past year as Brandywine escaped the slaughter in tech stocks that has wasted so many rival funds.

Brandywine finished the year's first half down 11%, vs. a loss of 14% for the average growth-stock fund. According to Morningstar, the fund has outpaced the Standard & Poor's 500-stock index over the last 10 years by an annual average of 2.5 percentage points, and at lower-than-average risk.

To hear how Friess has been positioning his portfolios of late -- and what his intelligence network is picking up -- I sat down with him recently in Chicago during Morningstar's annual investment conference. You can listen in on our conversation, which also touched on his plans to sell a piece of the firm and rumors of his political ambitions, via the edited excerpts below:

Q: How's business?


We're very grateful that we've taken a cautious approach since March a year ago. As you know, we had 67% [of assets in] technology [stocks] at that time. And we saw ahead of others what was happening and we cleaned that down to as low as 9% of the fund in technology. So we sold things like Nortel (NT ) at $71 and Nokia (NOK )at $58...Nortel now is, what, below $10 and Nokia is halved.

Q: Ouch.


I think we saved our shareholders about $1 billion....So I think it speaks well to the approach of fundamental analysis and not only talking to the companies who are going to tell you the best story, but we talk to competitors, suppliers, and customers. That's where we got the insight in the case of Nokia.

Q: What do you mean?


We [talked to] a distributor of cell phones in Europe, and that was one of the first tips that the whole technology thing could be vulnerable. Because the [stocks] were priced to perfection and they were well above our [price-to-earnings ratio] parameters. And as soon as we saw the first wisp of any concern, we were out the door.

Q: When did you talk to that distributor?


It was probably March of 2000.

Q: So how much of your portfolio is in technology now?


Closer to maybe 9%.

Q: O.K. What will tell you there has been a change on the technology front?


Well, we have a subset of our key theme, where we say, "Never invest in the stock market, invest in companies." And so we say the same thing about technology, which is never invest in technology, invest in individual technology companies....So what we look for is the same thing we've been looking for for 30 years: Earnings [that] are going to be up nicely.

Q: What are you seeing now? What picture is your research showing you of the economy and companies in the next year or so?


Concern. For example, I was visiting with two CEOs of chemical companies and they were lamenting that energy costs for each of them are going to be up like $1 billion year-over-year. And, secondly, with the economy's level of activity, it's very hard to pass along prices. So that isn't a very exciting outlook. There's plenty of anecdotal data that we're [only] part way through the Clinton Recession [laughs].

Q: What signs will you be looking for over the summer to see if things are getting better or worse?


It's not so much that we're looking at the degree of how much worse it gets. If it's bad, we just want to be out of the stock. [In selling] Nortel, [for example] we frankly didn't have any idea it was going to have a $19 billion write-off, but we just thought things weren't rosy. And so we just avoid stocks where things aren't rosy. So some of the magnitudes of the drops have surprised us. But we knew the direction and, that's where we did well for our clients by knowing the direction of the trends.

Q: I see.


We don't subscribe to the theory that, "XYZ Co. is a great company. It's got a 30% growth rate for the next five years. Great management. Great product." We don't care....Look at how Cisco was telling everybody things are great -- and within six weeks it just went off the cliff.

Q: What do you think happened there?


That's one of the realities of how the world works. Just think in our personal lives, how we get blindsided. We've had so many friends who have just had the most idyllic life -- and then a guy falls asleep and drives his Suburban down an embankment. Life generally is full of unexpected realities -- the unexpectedness is part of reality. And in the business world it's no different. These things just can't be predicted.

Q: You've said you're looking to sell a piece of your firm, Friess Associates, and that negotiations now have gotten serious. Is an announcement imminent, and is it true that by insisting on the right kind of partner your adviser, Goldman Sachs, has told you that you may be leaving up to $100 million on the table?


We can't provide a time frame as to when any negotiations might be finalized. [My wife] Lynn and I enlisted Goldman Sachs to help us accomplish estate-planning goals while also addressing ways to transfer some ownership to the next generation of Friess teammates. Goldman's mandate is to maximize the effectiveness of any potential combination that would make achieving these goals possible, not to maximize our financial gain. The bottom line is that our top priority is preserving our unique firm culture [and] investment approach. The $100 million figure...is accurate.

Q: How about these rumors I hear that you're planning to run for Senate from Wyoming, where you have a home in Jackson?


The rumor may very well go the route of earlier urgings for [me] to do a Ross Perot-type run for President. When the trial balloon was sent, [I] couldn't get any of [my] four kids to vote for [me]. Kidding aside, the rumor is not true.

Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BW Online

Edited by Patricia O'Connell

Before it's here, it's on the Bloomberg Terminal.