A Quiet Fund That Speaks Loudly
By James A. Anderson
Kenneth L. Fisher's mutual fund was an afterthought, a way to spend more time on other priorities. The Palo Alto money manager devotes most of his time to the $10 billion he invests for pension funds and wealthy clients. Second on his list is writing: He pens columns on investing and has authored several books. He saw his Total Return portfolio as an efficient way to manage and monitor smaller accounts for his big-money clients.
For a guy who says he's not focused on mutual funds, Fisher is doing extremely well -- so much so that his track record would make the fund an easy sell were he inclined to push it. Through Nov. 30, Purisima Total Return Fund (PURIX ) had posted a 2001 total return of 4.8%, placing it in the top 1% of Morningstar's classification of world funds -- portfolios that invest around the globe, including the U.S. market.
Just over five years ago, Purisima Total Return -- now a $130 million fund -- was born. And while Fisher doesn't push it much, it's open to investors. "We were running a lot of small sums for high-net-worth investors to cover granchildren's college accounts and the like, so we thought it would make it simpler to lump them together," he says. "But we're really not in the mutual-fund business. We don't market the Total Return fund, we don't push it through distribution channels, and we don't plan to do so."
PLENTY OF CHOICES.
Fisher's long-term stats have earned Purisima Total Return a spot on BusinessWeek's A-list of low-risk, high-return equity funds, as well as a five-star rating from Morningstar. Over the past three years, ending on Nov. 30, Fisher's work has garnered an 8.4% average annual total return, within the top 19% of funds in his category and far above the 0.5% the S&P 500 has managed over the same period. A 13.5% average for the past five years places Purisima Total Return in the top 6% of world stock funds and 3.5 percentage points above the S&P 500's showing.
Fisher says he builds his portfolio around the MSCI World Index, a benchmark of some 1,000 stocks from around the world, divided roughly 50-50 between the U.S. and the rest of the globe, including Europe and the Pacific Rim. That grouping gives Fisher plenty of choice when he's piecing together a portfolio.
He first selects country weightings according to the places he believes will benefit from macroeconomic factors. Then, he and two other managers at his company pick industry groups within the MSCI portfolio that they think are set to outperform the market. "It's a process of exclusion rather than selection," he emphasizes. "If we like an industry sector, we calculate what type of exposure we'd like to have to companies in the group, whether that's 3 or 5 out of a list of 19 in the MSCI index," he says. Fisher's spin on the MSCI World is working. This year, the benchmark is off 16.1%, while Total Return is up almost 5%.
SEEKING GOOD POSITIONING.
Businesses strapped with more debt than their peer group is the first to get crossed off the list. He also nixes holdings with what he calls "weird product lines." An example is AOL Time Warner (AOL ). "Once the company's merger went through, you had an example of a tech stock turning into something completely different," he notes. "We would have avoided that." That's a decision Fisher doesn't rethink at all. AOL shares slid 54.1% in 2000, and the stock of the merged company has risen a mere 0.3% this year.
A team of 35 in-house analysts looks over market shares, production costs, and product lines. Fischer takes their findings and then strikes the weakest companies from his industry lists. "We're looking to cross off companies that have an obvious lack of strategic positioning," he says. "An example is Kmart (KM ).... The stock may go up over the next 12 months, but from our point of view, there's no good reason for the company to exist."
Fisher says his modus operandi allows for quite a bit of flexibility. He says he's very willing to move from growth stocks to value, or to shift large chunks of the fund's assets into bonds. On occasion he's even willing to short stocks.
Take 2001. Late in 2000, Fisher considered a few statistical models projecting the direction of the market. One weighed the collective opinions of stock strategists from the major brokerages and lesser-know banks. Fisher says the finding that most strategists were looking for a rebound led him to turn considerably bearish. "That's based on the laws of supply and demand," he says. "That analysis would lead most investors to think that the worst was over. They would commit money to the market and have nothing to spend should things continue to go badly."
As a result, Fisher shifted to a "market-neutral" strategy, opting to build large stakes in bonds and short positions (bets that stocks will fall). He has continued that same course for much of 2001, with a 38% stake in bonds and a roughly 30% bet on short positions on the Nasdaq, S&P 500, and S&P Midcap 400. The remaining portion of his fund is invested long in the few stocks that Fisher has determined make his grade.
An ability to shift rapidly helped Fisher veer out of the tech implosion of 2000. The money manager says in late 1999, his outfit's market forecasts predicted trouble ahead. The fund had 35% of its assets in tech shares. A decision was made to pare that stake down considerably, and it now stands at around 12%, where it has been for much of 2001.
Within his stock porfolio, Fisher has benefited from a couple of timely macroeconomic bets this year. He has overweighted European shares, including stakes in two large French companies, the pharmaceutical maker Aventis (AVE ) and oil producer Total Elf (TOT ). Dutch companies Unilever (UN ) and Royal Dutch Shell (RD ) are two other European holdings. With the advent of euro notes and coins in January, he thinks that European capital markets should see good inflows of cash in the coming year. Morningstar data for Sept. 30 put Total Return's stake in Europe at 10.4% of assets.
Fisher is less optimistic about the U.S., where he has 8.4% of his assets. He has taken a conservative approach with the American portion of his holdings, leaning on health-care-products maker Johnson & Johnson (JNJ ) and consumer-staples producers such as Procter & Gamble (PG ) and drugmaker Merck (MRK ).
You can expect to see Fisher stick out this market holding a handful of value shares, some fixed-income positions, and some shorts to boot -- a mix he says should deliver a respectable return in an otherwise dismal market. "Our stance is that by remaining market-neutral, we've hedged our bets," he explains. "We've done well so far, and if things don't go as we're betting, we can still afford to give some back for now."
Anderson teaches journalism at the City University of New York. Follow his Mutual Fund Maven column, only on BW Online
Edited by Patricia O'Connell
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