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| | Mutual Funds
Let fund managers learn on someone elses dime
As Berger Funds tries to replicate its heady pre-2000 success, its new managers are still learning the ropes. Don't let two funds with double-digit returns fool you; someone else is steering them.
By Timothy Middleton
Last year, Berger Small Cap Value Fund (BSCVX, news, msgs) put on a dazzling show, advancing 20%. Its sibling, Berger Mid Cap Value (BEMVX, news, msgs), rose 20.5%, for its third double-digit gain in as many years.[
Unfortunately, every other Berger fund ended up with double-digit losses -- even Berger Balanced (BEBAX, news, msgs), which is 40% bonds. The difference between the two groups: The value funds arent run by Berger, but rather by a Chicago-based advisor.
The last several years have been tumultuous at Denver-based Berger. Its funds did spectacularly in 1998 and 1999 and then imploded when the Internet bubble burst. Those managers left in 2000, replaced by an almost entirely new team that is short on experience running mutual funds.
On the value side of things, theres an exceptional track record and great consistency of management, says Alan Papier, who covers the fund family for Morningstar. Turning to the Denver side of things, theyve been characterized by almost the exact opposite.
Since management is the most important consideration for mutual fund investors, the Berger part of Berger is best avoided; there are plenty of better alternatives. Existing shareholders who choose to stay around are paying for their new managers education.
Time for a new winning formula
Berger is a tiny part of Stilwell Financial (SV, news, msgs), the financial-services operations spun out of Kansas City Southern Industries (KSU, news, msgs) two years ago. The bigger part of Stilwell is Janus Funds, which accounts for 95% of its revenue. Janus is also headquartered in Denver.
The Berger funds, named after the founder, William Berger, trace their roots to 1974, when the directors of what was then called "One Hundred Fund" hired Berger Associates to manage it. Renamed Berger Growth (BEONX, news, msgs), it quickly became a superstar, posting double-digit gains in four of the next six years, culminating in back-to-back gains of more than 30% each in 1979 and 1980.
Like Janus, Berger became synonymous with the shoot-out-the-lights, growth-at-any-price style of the late 1990s. But the bear market decimated it. Berger Growth tumbled 18.9% in 2000 and a further 32.5% last year. Berger Select (BESLX, news, msgs) crashed more than 30% in the first year and nearly 40% in the second.
Amid that carnage, the former managers left. In June of 2000, Berger hired Jay Tracey as the chief investment officer of its growth funds group. He is also sole manager of Berger Growth, and co-manages Large Cap Growth and Berger Select.
Tracey had been one of Bill Bergers first hires, in 1976, when he was fresh out of college, and remained on his team for 12 years. He then departed to work for Founders Funds and, later, Oppenheimer Funds.
Tracey says Bill Berger was a growth investor in the classic sort of style -- in the same general category as people like Mr. T. Rowe Price. His mantra was that profitable, successful companies become profitable, successful investments.
Tracey seeks stocks that demonstrate strong consistent growth -- at least 15% for big caps, more for smaller stocks -- and have the financial strength and market share to maintain that growth in the future.
Instead of a roll-the-dice strategy, Tracey promises to tone down the funds risks. To cite one example: In Berger Growth Tracey owns a hot-concept stock called Panera Bread (PNRA, news, msgs), which has nearly tripled in the last year. But he owns two and a half times more of Wal-Mart Stores (WMT, news, msgs), a stodgier but much safer growth stock.
Meanwhile, Berger is burying its dead. Berger Select is being merged into Berger Growth in April. At the same time, another of Bergers failures, Berger New Generation (BENGX, news, msgs), is being merged into Berger Mid-Cap Growth (BEMGX, news, msgs). Over the last five years, New Generation has ranked in the bottom 20% of funds of its type.
Adding value
Even as its growth funds are being remodeled into what Tracey hopes will be their formerly great selves, Berger has opened its own value wing by acquiring, last December, Bay Isle Financial of San Francisco. Its chief investment officer, who holds the same title in Bergers value group, is William Schaff.
Schaff is not a traditional value investor; theres very little about him that is traditional at all. For years he has been an investment columnist for Information Week magazine and the creator of its Information Technology 100 Index.
Schaff created a mutual fund tracking the index in 1997, and Berger began distributing it three years ago as Berger Information Technology (BINFX, news, msgs). That fund shot up 165% in 1999 and ranks in the top quartile of Morningstars technology funds.
But Schaffs main business is running value-oriented portfolios for wealthy individuals and institutions. Last September, Berger launched Large Cap Value Fund (BLCVX, news, msgs), managed by Schaff. Schaff is also hiring a second small-cap analyst and at some point expects Berger to launch a new small-cap value fund.
Schaff is a former engineer and computer scientist who developed, in graduate school, a system for simulation modeling. Unlike most investment managers, including Tracey, Schaff doesnt have computerized screens that winnow out stocks that lack his favorite qualities. Instead, he analyzes literally every company in the Russell 1000 Index to arrive at what he considers its true value, and how it is likely to behave in a variety of scenarios.
Schaff buys companies when they are well below what he considers their intrinsic worth and sells them when they become fully valued. That usually takes as much as three years, although if it happens faster he sells just as fast.
He cites Tyco International (TYC, news, msgs) as a perfect example of his kind of stock. My price target on this stock was $43, and it traded above that level for years, he says. All that time he didnt own it. But when it crashed to $31, he jumped in. (Tyco closed at $31.80 on Monday.)
Far from tried and true
Tracey and Schaff share a big disadvantage: Neither has a much of a public track record in the investment styles they currently run. Schaffs technology fund has distinct value attributes -- below-average price/earnings ratios and the like -- but its a sector fund.
In Traceys case, he did well in the two full years in which he was sole manager of Oppenheimer Discovery Fund (OPOCX, news, msgs), handily beating the Russell 2000 Growth Index in 1995 and 1996. But thats a small-cap fund and hes now an all-cap manager. Last year at Berger Growth, a large-cap fund, he badly trailed the Russell Top 200 Growth Index.
Meanwhile, the best-performing Berger funds are its existing value offerings -- the small-cap fund, which is closed to new investors, and Mid-Cap Value, which ranks among the top 2% of such funds over the last three years. Both are managed by the independent firm Perkins Wolf McDonnell & Co. in Chicago.
All of which leaves Berger as a firm in flux -- and therefore a risky place to entrust your fortune. Its record is too spotty to inspire confidence. Personally, I wouldnt think of investing in any Berger funds (except those managed by Perkins) for at least a few years, until the new Tracey and Schaff teams can demonstrate the skills they claim to have.
What they're buying now
Poised for recovery: One of Schaffs first purchases in the new Berger large-cap value fund is Interpublic Group (IPG, news, msgs), the worlds No. 1 advertising company. He bought it last November, at $21 a share, and it promptly surged to $29 as the market began to bet the recession would end soon and the ad market revive. Schaff is holding out for his target price of $32.
Rising: Panera Bread (PNRA, news, msgs) is a casual dining chain that stresses custom-baked breads; it once owned the Au Bon Pain chain, but sold it in 1999. Despite an astronomical P/E ratio of 89 on trailing earnings, Tracey thinks the firm is more likely to miss its growth estimates on the high side than on the low side.
At the time of publication, Timothy Middleton owned none of the securities mentioned in this article.
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