Newsgroups: biz.americast.samples
From: americast-post@AmeriCast.Com
Organization: American Cybercasting
Subject: FUND SURVEY
Date: Sat, 29 Aug 92 14:53:54 EDT

This is an actual portion of the electronic edition of Forbes, as
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FUND SURVEY

Clean air and
clear thinking

By William P. Barrett

Turned off by Wall Street? Here are a couple of far-from-
Manhattan funds that handily beat their markets.

JOHN TEMPLETON started it all. Years
ago he moved to the sunny Bahamas
and proved that investment success is
by no means proportional to physical
proximity to Wall Street. Indeed,
avoiding the financial crowd is proba-
bly a good idea. Just look at Warren
Buffett, who from his retreat in Oma-
ha became another investment leg-
end. Templeton's outpost in the At-
lantic may have made it easier for him
to venture off in directions that his
competitors back in New York and
Boston overlooked_such as Japa-
nese stocks when they were much
cheaper than U.S. stocks.
 In this day of faxes and Bloomberg
terminals, it's ever easier for a fund
operator to work from the hinter-
lands. And more and more are doing
it.  Here are two relatively unsung
fund management pairs, one of
stocks, one of municipal bonds, who
work in unlikely places and beat the
averages.

Few household names
From the rural upstate New York
village of Cobleskill, Thomas Putnam
runs the FAM Value Fund. Its tiny size
($22 million) is an advantage to a
stock picker following Putnam's strat-
egy, which is to find overlooked com-
panies so small that most Wall
Streeters have never heard of them.
 Companies like Raven Industries.
This Sioux Falls, S.D. balloon and
sportswear firm has a market capital-
ization of all of $76 million. If the
Fidelity Magellan Fund bought in-
indeed, even if it bought the entire
company-the position would ac-
count for a mere fraction of 1% of
Magellan's assets. At FAM Value, how-
ever, the $425,000 stake in Raven is
one of the larger holdings. The stock
has climbed 159% since Putnam start-
ed buying it three years ago.
 The 48-year-old Putnam has a
knack for picking these little outfits.
Over the five years ended June 30, he
and comanager Diane Van Buren de-
livered a compound annual return of
the S&P 500. Were it not for the fact
that  is too small to be rated by
FORBES, the fund would be a candidate
for the Best Buy rankings of funds
specializing in small-company stocks
(see p. 110). The fund has a back-end
load that starts out at 5% and declines
to 0% after five years. However, there is
no customary 12b-1 fee that goes
along with the disappearing load. The
fund's expenses total a reasonable
1.5% annually.
 Putnam's explanation for his suc-
cess: ''Out here in the country you
can think clearer.'' He and Van Buren
look for promising companies that
have far less debt than equity, a return
on equity topping 15% and a price/
earnings ratio below 12. It's pretty
hard to find big companies with num-
bers like that in a market whose P/E
(excluding negative earnings) aver-
ages 17. But there are little companies
that fit the bill. ''We don't want
household names,'' Putnam declares.
 That makes it easier to visit and
quiz top management. ''The answer
we like to hear is, 'We're cheap.' What
we don't like to see is an executive
parking lot full of new Mercedes,''
Putnam says.
 Top holding is Trustco, a Schenec-
tady, N.Y. bank that specializes in
home equity loans. Another invest-
ment in FAM's backyard is Conmed, a
Utica maker of disposable hospital
products. Besides Trustco, the port-
folio includes a large dose of little
banks, such as FirsTier Financial of
Omaha and Fourth Financial of
Wichita.
 Then there's Poe & Associates, an
insurance broker, and  Industries,
a manufacturer of business forms and
metal containers. Ever hear of
Systems (test equipment), Datron
Systems (satellite and radar gear) or
Melamine Chemicals (a vital ingredi
ent for finishes)? All present. FAM
Value's turnover last year was an ex-
traordinarily low 14%.
 Why is Putnam in Cobleskill? Grew
up there, and likes the place. The son
of a textile mill owner, he took an
M.B.A. from Tulane and worked as a
market researcher with Corning Glass
in Elmira. He lost his job during the
early 1970s recession. By then the
family business had been sold, so Put-
nam came back to Cobleskill to man-
age the resulting cash. He started
Fenimore Asset Management in 1975
to handle nonfamily accounts. That
he started in the mid-1970s was pure
chance, but it was the best possible
time to buy stocks, just recovering
from the 1974 crash, which took the
Dow below 600. Van Buren, 34,
came on in 1980. In 1986 they started
FAM Value.
 Besides the fund, Putnam and ten
employees handle $120 million in
pension and individual accounts.
They work without a Dow Jones tick-
er or a stock quote machine. Deer
roam through the parking lot, and
raccoons rummage near the back
door. The rent is an eighth of what it
would be in Manhattan. Who needs
Wall Street?

The slopes
H. Garrett Thornburg Jr. put his
money management office in Santa
Fe, N.M. (elevation, 7,000 feet) be-
cause it's near ski slopes. But during
weekdays another kind of slope-the
yield curve-occupies him. Along
with Brian McMahon, he oversees the
Limited Term Municipal Fund-Na-
tional Portfolio, the best performing
of 16 short-term muni bond funds
tracked by Lipper Analytical Services.
 Over the past five years the fund,
with $530 million in assets, has pro-
duced an average annual return of
7.4%, equivalent to a taxable 10.7%
for those in the top bracket.
 The funds goal: capturing most of
the yield offered by long-term bonds,
but with far less risk. The fund suc-
ceeds admirably; a chart of the net
asset value shows a nearly straight
line, trending slightly up. In total
return FORBES ranks this fund A+ in
down markets and F in up markets-
just what you would expect in a
short-term bond fund. (For muni
fund ratings, see p.180.)
 How do Thornburg, 46 and Mc-
Mahon, 37, get such good results?
Buying bonds in states that are
deemed undesirable by the bond
crowd in New York. ''A state may be
having economic problems, but local
school boards don't default,'' says
Thornburg. ''But it depresses the hell
out of bond prices. We just love pan-
ics.'' The fund loaded up on Texas
municipals during the mid-1980s,
when oil prices hit bottom and every-
body was writing off Houston and
Dallas. Says McMahon, ''People
thought we were crazy, but no one's
defaulted.''
 Currently the largest state hold-
ing-12% of the portfolio-is bonds
from Massachusetts, primarily
bought during the past three years,
after the collapse of the so-called Mas-
sachusetts miracle. Next target?
''Maybe California,'' McMahon says.
''I think things are getting rough, but
we're not yet ready to buy.''
 Typically, Thornburg and McMa-
hon buy shorter-term portions of a
longer-term issue. Tax-exempt
bonds, unlike corporates and U.S.
Treasurys, usually are offered with
assorted maturities in the same issue
ranging from 1 year to 30 years. The
Santa Fe boys give up a little yield but
a lot of risk in taking the shorter
maturities. By holding to redemp-
tion, they keep transaction costs to a
minimum.
 Thornburg was a limited partner at
Bear, Stearns when he moved to Santa
Fe a decade ago to form Thornburg
Management Co. He helped turn in-
dustrial development bonds into tax-
exempt money market funds. His
ideas were so good, one observer
wrote, that they either made money
or were outlawed.
 One brainstorm was a municipal
lease bond fund, which specialized in
short-term paper issued by municipal-
ities to buy equipment like sewer-
cleaning trucks (FORBES, May 20,
1985). Thornburg recruited McMa-
hon, then in the corporate finance
section of Norwest in Minneapolis, to
help oversee it. A promising idea, but
the two found it harder and harder to
buy leases with decent legal protec-
tion in the form of collateral. (It's one
thing to repossess a fleet of trucks;
grabbing the city jail is another mat-
ter.) In 1986 they converted the lease
fund into the short-term muni fund.
One drawback: a 2.75% load.
 Going from Manhattan to Santa
Fe, Thornburg gave up a little conve-
nience (the ride to the Albuquerque
airport is 75 minutes) but a lot of
crime and taxes. Says he, ''Not a bad
tradeoff.''
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