Brandywine Quietly Putting Ill-Timed Move Behind It

Last year, the mutual fund world shamed Foster Friess into near oblivion, staring down its collective nose with a disapproving glare. The (BRWIX)Brandywine fund manager had committed the cardinal sin of pulling money out of the market as it was taking off, and putting it back in as it was landing.

This year, Friess' fortune is back on track. Friess can now meet those accusatory glances with his easy smile and, without gloating too much, simply point to the recent performance of his Brandywine mutual fund: It's returning 42.7% year to date, according to Morningstar.

That's better than two-thirds of its mid-cap peers, and more than doubles the 17.1% return of the S&P 500 index. With the latter feat, Friess is solidly among the 34% of active mutual fund managers who are beating the index this year.

"The fund has gotten back to doing what it does best, which is stock selection and not trying to forecast what's going to happen with the economy," says Peter Di Teresa, a Morningstar analyst who follows the fund.

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Brandywine's Friess: 'We Felt Justified All Along'

But you wouldn't know it by looking at how investors are treating his fund. They're still taking money away from him. Brandywine, once a big kid on the block with $8.4 billion in assets, has shrunk to a relatively puny $4.2 billion.

This year alone, investors have yanked a net $1.3 billion from the fund, on top of the $2.2 billion that flowed out in 1998. That appears to be changing now that the message is getting out about Friess' recent performance. Simply put, Brandywine's back.

The fund has been cleaning up nicely -- up 23.2% since the end of the third quarter -- with a 62% weighting in tech stocks. Even for the aggressive Friess, that's a big chunk of his fund to put in one sector, the highest amount he's had in tech in the last five years, according to Morningstar. And it has helped offset some boo-boos in the portfolio, notably Tyco International (TYC) and Providian Financial (PVN), both of which have had rough fourth quarters. (See stories here and here.)

Brandywine's Bets
Top 10 holdings of the Brandywine fund
Sun Microsystems
Tyco International
Apple Computer
Nokia
Gemstar International
Tandy
Adobe Systems
Tellabs
Providian Financial
Motorola
As of Sept. 30. Source: Morningstar.

"We have typically avoided over-researched, big-name, highly visible, high-P/E companies -- the Microsofts (MSFT), Wal-Marts (WMT) and Home Depots (HD) of the world," Friess says in an email interview. (Please read our transcript of Friess' thoughts.) "We prefer to find a No. 7 company in an industry, figuratively speaking, headed for the No. 3 spot because its recognition increases and its P/E expands."

When Friess moved into cash in late 1997 and early 1998, the Asian financial crisis was brewing. While Friess and his associates say the move was based on worsening fundamentals in the stocks they held and not a market-timing move, it's a shift mutual fund watchers haven't let him forget.

"He'll have a hard time ever living that down, and justly so," Di Teresa says.

Friess counters that he has nothing to live down.

"We felt justified all along in sticking to our disciplines," he says. "The critics made the error of comparing our results to earnings-less Internet stocks and the mega-cap, high-multiple stocks, both of which we typically avoid."

That discipline entails a "block and tackle" approach, Friess says, looking for rapidly growing companies that he and his 35-person team of researchers believe have been undervalued by conventional thinking on Wall Street.

But Friess insists that the fund underperformed its peers only for the first quarter of 1998, and blames the backlash on "misperceptions."

"We believe the misperception is more a reflection of our critics' lack of insight about the market's narrowness and our strict disciplines rather than knowing the reality of what we really did," he says.

Judging from the tone of betrayal investors exhibited during 1998, some may never come back. But Friess says the fund is better off for what he did.

"Concerning the stocks we sold, 80% of them declined with 50% of them falling between 50% and 90%," he says. "We exited specific stocks very quickly that we needed to sell."

Friess says his funds saw $7.6 million in net inflows last week.

"Shareholders who are able to see through the superficial analysis of our critics and believe in us ... and who believe in the strategy that earnings do matter ... will be all that matters in the end," Friess writes. He seems to have little patience for short-term investors who flinch at the market's whims.

"I believe investors should pay more attention to the predictability and the reality of future earnings and not get so preoccupied with market swings, which are often a function of what Alan Greenspan had for breakfast," he says.

Because the fund doesn't run any marketing or advertising campaigns, fund flows have always been driven entirely by performance, company spokesman Chris Long says. So the future, as with the past, will depend on Friess' performance numbers.

"We are 100% reliant on performance," Long says.

Long says the firm regrets the money it lost for its shareholders.

"We feel very bad because a lot of people joined us in the second and third quarters of 1997 and then left us in the second and third quarters of 1998. So they basically were in a 12-month period where they lost money. And if they would have stuck it out, now they would, of course, be in the black," Long says.

Morningstar's Di Teresa agrees that investors need to cut managers some slack.

"I think a year is a reasonable amount of time to wait to give a manager a chance," Di Teresa says.

If only investors could have known that a year ago.

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