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Substance Over Style

Money managers who continue to sacrifice performance for style purity risk losing their assets and their jobs, Cramer says.

"Style purity," says money manager Christine Baxter, made her underperform. If, according to this morning's Heard on the Street column in

The Wall Street Journal

, she had not been true to her stock-picking model, she could not please clients in her once-popular



Emerging Growth fund.


Mutual fund shareholders don't care and have never cared about style. They care about return, as in, if you generate it you keep the money, and if you don't they take it away.

Mutual fund managers all over the country will soon face the same dilemma that the underperforming Baxter is currently experiencing.

Baxter, after three years of shooting the lights out with her earnings-momentum model, has fizzled badly, and her model hasn't generated many winners lately. That she is a slave to it, in some ways, is strange because this model is really just one of those weird constructs made up by Wall Street.

Chief financial officers of publicly traded companies work out numbers that can be beaten by their companies and then give them to Wall Street analysts, who publish the numbers. After the companies beat the numbers, the analysts raise them to levels that the CFOs guide them to. Baxter's model would lead her to buy the stocks that crush the estimates in this number-bump charade.

And that's worth being pure to?

Baxter claims this model led her away from Internet stocks, which is something, quite frankly, that's not true, as

America Online





TheStreet Recommends

are two in-the-black companies that have pulverized estimates.

More important, though, is that many mutual fund managers subscribe to this model, and a large number of them are getting hammered this year because stocks have ceased to jump after the bumps. (That might be because everyone knows it is a charade, or it might be because there are no shorts left to capitulate and cover when the stocks beat the numbers.)

I know, who am I to cast stones? OK, I will tell you who I am. I am a manager who, last year, after 16 years of beating the market, sacrificed performance for style purity in the first three quarters of 1998. For this, I was sacrificed by my investors, many of whom had been with me since the early '80s! I stuck with small-caps, including small-cap savings and loans, longer than I should have, and I lost assets under management. In the fourth quarter, I executed a difficult style change that shattered near-term performance in order to get back in the hunt.

Nevertheless, I still got hit with a Baxter-type article in

The New York Times

, detailing my troubled 1998. (I made money, but I waived my performance fee, something left out in the article and in the subsequent


hatchet job.) It was extremely embarrassing, and it knocked my tarnished pride for a second loop after a very discouraging year.

But, in retrospect, I made the right move. I had to shuck my formerly winning ways to stay in the performance biz. And it has worked. I believe other managers who continue to sacrifice performance for style purity will have to make the same gut-wrenching change or risk losing their assets and their jobs.

We have five months under the belt, and those who have stuck with the earnings-momentum model lag well behind the averages. Their shareholders, in the meantime, have gone online and often have generated better returns using the same information that is available to the managers.

It's time for those who sacrifice performance for style purity to wake up and smell the coffee. In seven months, they won't be able to afford a latte vente if they don't.

Random musings:


New York Times

drive-by shooting article in the Hamptons, quoting a bunch of people saying extremely stupid things. My favorite, which hopefully will trump my "I can buy anything I want" misquote -- I was referring to a supermarket trip and had been badgered endlessly by a


reporter to talk about my newfound wealth when I had none -- was the hedge fund manager who "got rid of the wife" for a yacht! (That one's on B5.) Hoo-hah! Bet his face is red today!

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long America Online and Yahoo!. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at