A fund manager who invokes gratitude
It's rare to hear a top investment professional preach the gospel of stock ownership using such terms as ``spiritual benefits,'' ``harmony,'' and ``gratitude.'' Not that money pros don't think in those terms, it's just more common to hear about the influences of ``fear'' and ``greed.''
Yet Thanksgiving is only a few days away, and stock prices are popping through the shingles: The Dow Jones industrial average soared to new highs again last week, closing Friday at 1,4xx.xx, up xx.xx points in five sessions.
As a beneficiary of such bounty, it seems appropriate that John M. Templeton should have brought up gratitude at the Templeton funds' annual shareholder meeting in New York last week.
This former Yale economics major and Rhodes scholar now has $4.25 billion under management in five worldwide mutual funds. And while many fund managers can boast of success under certain conditions in short spurts, Mr. Templeton's funds have typically ranked among the top-performing mutual funds for the last 25 years.
Templeton is noted for an approach that is long-term, unorthodox, and grounded in God-centered optimism. For instance, there probably aren't many brokerage firms that begin their investment strategy meetings with prayer. ``We don't pray that our stocks will go up. We pray because it makes us think more clearly,'' Templeton once said.
Thinking clearly in the long term is a Templeton forte. Last Wednesday, he noted that ``the next bull market after this . . . may be a beauty.''
The next bull market? On Thursday, the Dow jumped 23 points, indicating it was too early to write off this bull market. Analysts say the rally was stimulated by the continued slide in interest rates -- 30-year Treasury bonds fell below 10 percent for the first time in five years.
One boost to this and future rallies could be a shortage of stock. Templeton noted that the total supply of stock in the market shrank by $70 billion last year because of company repurchase programs, mergers, and acquisitions. In 1985 so far, the market has shrunk by at least another $70 billion, according to Templeton's figures and those provided by IDD Information Services in New York.
This shrinkage and the growth in total cash (counting all paper due in the next 18 months) mean cash now exceeds the aggregate value of total equities available. ``You should not rule out the possibility of a shortage of shares,'' says Templeton.
And while this bull market is 39 months old, he pointed out that current prices on the Standard & Poor's 500 stock index relative to highest previous annual earnings are still 10 percent below the average for the last 45 years.
How does Templeton intend to profit in the next rally? Essentially by following the same methods he employs now:
Buy bargains -- usually stocks selling at a low price-to-earnings ratio.
Diversify. Buy worldwide, not just in the United States (although 60 percent of Templeton funds are now in the US).
Stay flexible. Don't get stuck in one particular stock or strategy. ``At present, we're investigating eight different investment methods, and we've been doing that for 45 years,'' Templeton says.
His current strategies are leading to purchases of ``large growth stocks.'' Recent buys include about $50 million invested in both Charter Medical and Southland Corporation.
Templeton funds are the second-largest shareholders of Union Carbide (since Bhopal, share prices have almost doubled) and News Corporation, Rupert Murdoch's Australian-based media conglomerate.
IBM is fundamental to most large portfolios. Not Templeton's. ``We have not yet found any bargains in American technology stocks.'' He expects competition to squeeze IBM's profit margins, limiting earnings growth to 12 percent a year -- a projection less optimistic than most analysts'.
For the last two years, Templeton funds have been selling oil holdings. But Royal Dutch/Shell remains an inexpensive favorite. On oil prices, he says, ``There's a greater-than-even chance that OPEC will break up.''
(Weak oil prices are not the only problem besetting the oil industry. Last week, Texaco stock tumbled after a jury in Houston found that the nation's third-largest oil company had enticed Getty Oil to back out of a merger agreement with Pennzoil. Texaco was ordered to pay $10.53 billion to Pennzoil, the largest such award in history and one which, if upheld, could floor Texaco and vastly enrich Pennzoil. Texaco is vigorously appealing the decision.)
Templeton says a high real return makes this ``a golden period for bond buyers,'' but he favors stocks for their inflation protection. ``It's not only possible but probable there will be a financial catastrophe'' in the next two to four years. But the market crash and social upheaval of the depression era will be averted through government support for banks, he says. The rescue effort, however, may push inflation to the 20 percent level sometime within the next five years, he predicts.
As of Sept. 30, the Templeton World Fund had climbed 106.6 percent (including dividends and interest reinvested) in the last five years, according to Lipper Analytical Services. In the same period, the Standard & Poor's 500 rose 85.4 percent.
Templeton Growth Fund (up 77.5 percent) has not kept pace with the S&P 500 during the most recent five years. But over 10 years, Templeton Growth has risen an impressive 531.9 percent, vs. 254.4 percent in the S&P 500.
The ebullient gentleman in gray pin-stripe suit and suspenders closed the annual meeting by directing shareholders to be ``overwhelmingly grateful'' -- not only for the rise in the standard of living and the scientific and religious advances of this century, but for advances to come. Chart: Interest Rates.
Percent Prime rate 9.50 Discount rate 7.50 Federal funds 6.50* 3-mo. Treasury bills 7.21 6-mo. Treasury bills 7.27 7-yr. Treasury notes 9.55 30-yr. Treasury bonds 10.01 *Due to Friday computer problem