Funds for the Long Haul
These managers have stood the test of time for their investors
Royce has done so by combing through the universe of small companies to find hidden gems like Woodward Governor, a Rockford, Ill., maker of pumps and valves for the energy and aerospace industries. Earnings at the firm, founded in 1870, have risen more than 19 percent annually on average the past five years. Another nugget is Simpson Manufacturing of Dublin, Calif., which makes specialty connectors and ties for use in the construction industry. The company has enjoyed average revenue growth of more than 16 percent annually since going public in 1994.
Royce's fund doesn't favor any one sector over another, rather focusing on the small to medium-sized manufacturers and service firms that are the backbone of the economy. They may be great investments but are often eschewed by fund managers in favor of big names like GE and Microsoft.
Royce sees a competitive advantage in being able to toil where others fear to tread. "They're more interesting companies," he says of those in his fund. "They're going to be inefficiently priced because they're not well known." And in this market of distrust, they share another value that investors can appreciate: "Smaller companies typically are simpler companies. They don't have accounting screw-ups because they're not big enough to bury them in." -Tim Smart
LIBERTY ACORN
MANAGER'S BEST YEAR: 1976; up 65.2%
MANAGER'S WORST YEAR: 1974; down 27.7%
Sit down for a chat with Ralph Wanger and you could be fooled into thinking he's paying rapt attention, taking copious notes during a dialogue that's sure to be peppered with historical analogies (the Crusades are a biggie). But the notes turn out to be a sheet of paper filled with sketches of airplanes. One looks like a World War II vintage P-47 Thunderbolt fighter, while another resembles a Soviet Backfire bomber from the Cold War.
Obviously, Wanger, 68, is a guy fascinated by times past. And he's partial to things that soar and swoop. Luckily, both traits dovetail nicely with his job as a portfolio manager who looks to history to give him some insight into the present-day nature of the markets. And considering that since 1970 he has been running his Acorn fund (which Liberty Financial bought in 2000 and renamed Liberty Acorn), Wanger has plenty of personal history to draw upon as well. "I don't expect another bull to emerge for a very, very long time," says Wanger, who speaks in a slow, muffled style. His speech is punctuated by frequent pauses that give the impression he's accessing some data archive deep in his cerebrum.
Wanger bases his perilous prediction--25 years of sideways trading wouldn't be totally out of the question--not on the current direction of interest rates or earnings or consumer spending but on a circle-of-life interpretation of market history. Stocks, he says, can cycle through periods where "an ordinary person can make a whole ton of money" without much expertise (like the 1990s). And then there are times where they don't do much for years, though investors can still "do all right if you find the right companies, although the market won't bail you out." Over time, he has found enough winners to post an average annual return of 15.37 percent vs. 11.46 percent for the S&P 500. There's little surprise as to which era he thinks we're in now. Even though the stock market finished in the red for a third straight year, Wanger says he has been given some hope by current investor psychology. "The 1970s felt different," he recalls. "There was no liquidity, no trading. It was very hard to do anything, a very depressed feeling. But now you still have people believing in technology stocks."
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