The difference between investment success and failure isn't always a better idea or a shrewder strategy. Sometimes it's just a matter of timing, as Tim O'Brien might tell you.
O'Brien became unemployed last week, after working for four years as the manager of the Eaton Vance
Utilities fund, known as the
fund until last summer. Decide for yourself how good of a job he did.
The Total Return fund that O'Brien took over was focused on utilities, but it sometimes turned to real estate stocks as an additional income generator. When he inherited the struggling portfolio in 1995, he quickly dumped its real estate investment trust shares and swapped many of its electric utility stocks for telephone issues.
The fund bounced back for a while amid a bullish market for interest-sensitive stocks, and O'Brien looked good. His first big mistake, perhaps his only real error, took place toward the end of 1997. Looking to boost the fund's income, he moved money into REITs based on their historically strong fourth-quarter performance.
Total Return got creamed in a "disastrous foray," in O'Brien's own words. Telecommunications stocks posted strong gains, but so many late-year real estate stock offerings swamped the market in 1997 that his newly acquired REIT stocks drifted or did even worse. After a so-so 1996, he was suddenly behind the 8-ball.
"The opportunity cost of owning a REIT vs. a utility turned out to be very high," he says. "That was just a bad decision on my part."
O'Brien took a fresh look at the utilities landscape, a mix of high-flying telecom stocks and stodgier traditional alternatives. He came to a new conclusion. "I thought I could try to be the highest-yielding fund or I could try to be the best-performing fund, but I couldn't be both," he says. "So I cut the dividend in '98 and went for capital appreciation."
The portfolio was chock full of concentrated telecom positions at that point. He bought regional Bell operating companies,
The strategy worked like a charm through July of last year. Eaton Vance Utilities was up 15.4%, trailing the
, but about 3 percentage points ahead of the fund's peer group. Then the market started to slide, and O'Brien's telecom stocks fell like rocks.
The 1998 return for Eaton Vance Utilities withered to just 0.2% by early September and recovered to only 8.1% by Sept. 30, just a bit more than half of its performance as of July.
The Sept. 30 figure is especially important in this case because that was the date Eaton Vance had set to evaluate O'Brien and his fund. The verdict: It was time for him to go.
But not right away. The utilities manager and telecom specialist is sort of a one-man band at Eaton Vance, and there was no immediate replacement. The agreement, according to O'Brien, was that he would continue to manage the fund until he found a new job or Eaton Vance found a new manager, whichever came first.
That turned out to be a slower process than you might think. And something amazing happened in the meantime. All those telecom stocks came roaring back, and O'Brien's portfolio, essentially unchanged all along, looked good again.
It advanced 14.4% in the fourth quarter and finished 1998 with a total return of 23.6%. Eaton Vance Utilities ended the year ranked No. 21 in a field of 100, according to
Seemingly, there was a chance to rethink the O'Brien decision. He didn't have another job and Eaton Vance didn't have another manager as the first months of 1999 became history. No dice. Eaton Vance had made up its mind.
"I'm not knocking the company," says O'Brien. "The decision, when they made it, was fair. Strictly off the numbers, I can't say anything but that. Even I can appreciate the irony that things could have been a lot different. But you have to draw the line somewhere."
O'Brien's portfolio continued to do well early into 1999. Eaton Vance Utilities ranked third among 97 competitors for year-to-date performance through last week and sixth for one-year performance.
Now Eaton Vance has a new manager for its fund, Judith Saryan of
State Street Global Advisors
. And O'Brien has an odd problem as he looks for another job. He keeps telling people Eaton Vance let him go based on performance, but prospective employers are skeptical. They think another reason is hidden below the surface. O'Brien swears there isn't.
He also has no problems with Eaton Vance sticking to its original position. Once you decide to fire a manager, he says, it's hard for everyone to work together again. "Frankly, if they had changed their minds, I would have politely accepted and started to look for something else. It was never going to be the same."
Steven Syre & Steve Bailey write for the Boston Globe. This column is exclusive to TheStreet.com. At time of publication, they held no positions in the stocks or funds discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy stocks or funds.