For the Long Term

With Dell, from looking at its numbers we've confirmed that the company is continuing to take share in many different segments. The stock hasn't done much for the last couple of years, yet the company has continued to grow. So on a free-cash-flow basis, the stock has become much cheaper. And we do think there will be a corporate spend cycle on the back half of this year and next year, and Dell should be a beneficiary.

On the down side, with First Data, the internal metrics seem to be weakening a little bit. I think if you look at the company's growth prospects, it's somewhat less than we thought. It's been an okay stock, but its growth is moderating.

If you look at Comcast, it's because of [the offer to acquire] Disney–I didn't think that made any sense. I like the Comcast assets. It's a very good price for the stock, but I think it made a mistake: I don't think it's going to get [Disney]. I've held onto where I am.

With Cisco, when the stock hit 28 to 30, I sold some because I thought it was ahead of itself.

Are there any bargain stocks out there? How do you find them? Take a look at what I call some of the megacaps. GE would fit into that. Microsoft would fit. Citigroup and Pfizer would fit, as would AIG.

Over the last five years there's been no absolute money made in these stocks. Forgetting relativity, these companies all pretty much doubled earnings. They've all come somewhere between growing earnings 80% and 120% over that five-year period. So that says that the wall has come down a lot, which is a combination of the fact that the price was too high in 1998 and 1999. But I think also that the cost is too low now for the types of growth that these companies have shown.

Look at those five as a basket. They all trade at about a market multiple, yet they are all dominant at what they do; they all have very good businesses. Does that make them cheap? I think if you buy them, you can get double-digit returns for the next several years without a ton of risk.

Lipper gives this fund its highest rating on overall return and expenses and its lowest on tax efficiency. Do you think those assessments are fair and accurate? Tax efficiency. That really gets me. One of the reasons it's not been tax-efficient is because this is a very old fund and there's a really low cost basis on a lot of these names. Then you go through a period like 1999-2000 where you tend to be shifting names because you get more conservative because the economy's weakening. You get a little more aggressive in 2002, so there's a little bit more turnover, even though it's below average within the sector, and you create a lot of gains. [Lipper] looks at [tax efficiency] on a going backward basis, but going forward it should have much better tax efficiency.

When I took over the fund in 1997 the cost basis was 40 cents on the dollar. So I tend to take offense to that comment: it's a backward-looking statistic.

I've seen this described as a conservative fund. Is that how you would describe it? It's conservative in that we think the best risk-adjusted returns are in what we would call conservative growth companies. Historically, if you look at companies that are expected to grow 10% to 15%, those stocks tend to outperform the stocks of very fast-growing companies.

If the fast-growing company can maintain, it tends to be much better, but very, very few of them actually do it. What we try to do is give people very good risk-adjusted returns, so it is conservative growth. We're not there because we want to be conservative. We're there because we want to give the best return to shareholders over time.

Is this fund a core holding? Yes. Compare it to core volatile funds, such as any technology fund. Say our fund is up 12% over time and a tech fund is up 12%. If you ask which one is a better holding, I'd argue that it's ours, for two reasons. First, we have less volatility for that return. Second, you are much less likely to make a bad investment decision. The problem with a volatile fund is that it's apt to buy in after a stock has gone up, and apt to sell it after the stock has done poorly. It's the nature of how people are. Because our fund is not as volatile, I think people are more apt to hold it.

What's your turnover rate? It's usually between 35% and 50%.

How does that compare with similar funds? It's about half to a third. Every year we are less than half the average turnover, because of our philosophy of trying to buy over the long haul. That's the better thing to do.

How important is the advisor channel in selling this fund? It's become more important. I think it's a good channel because people in that capacity are trying to make people money over time. They've realized that trying to make people fast money is not a good way to make a living. I think having a fund that can lead the market and do it with low risk is very good for us in terms of managing money, and it's very good for them in terms of servicing their clients.

It's an election year and the campaign has started early. What kind of an effect will this have on the economy and on investors? On the economy, I'm not sure, but from an investor's point of view, it can be negative if it stays close. Uncertainty is always a negative.

What more can be done to put investor fears to rest after all the negative attention given to mutual fund companies? I think the time horizon for all people's investing needs to get longer. Investing shouldn't be approached like you're at the casino looking for a quick score. And we all have to be more accountable.

Staff Editor Robert F. Keane can be reached at [email protected].