It's the story, of a man named Brady
If mutual-fund manager David Brady played baseball, he'd likely bat cleanup - the spot where a clutch hit is most needed.
Mr. Brady drives home big returns at Stein Roe & Farnham, the Chicago-based investment firm and subsidiary of Liberty Group.
His name leads the roster at Stein Roe's Young Investor Fund and Large Company Focus Fund. He's also the associate manager of the company's Growth Stock Fund. The three funds just happen to be the company's heavy hitters, churning out returns this year that often beat the Standard & Poor's 500 index. (See chart below.)
Their stellar performance stands in sharp contrast to most Stein Roe funds, which have been in enough of a slump this year to cause a shakeup in the executive suites a few weeks back. Funds and managers were rearranged. But Brady and his co-manager/partner, Erik Gustafson, stayed in the starting lineup. After all, why toy with success?
Brady's abilities illustrate a point that fund experts have long made: When investing in mutual funds, look for a manager with a successful track record.
More often than not, managers carry their stock-picking prowess to whatever fund they happen to be managing.
Brady's strategy is both hands-on and cerebral. Each week, he pores through newspapers and magazines, looking for global trends. And then he just sits back and thinks about them.
"I spend 10 to 15 percent of my time just thinking about the world," he says.
Among the trends he currently notes: the aging of the population in industrial nations, the corporate drive toward computerization and telecommunications, the rising wealth of young people, and the collapse of inflation as a major financial threat.
He then looks for companies that can profit from those trends.
But before picking his stocks, Brady does careful fundamental analysis. He takes apart the numbers, looking for the real story told through such details as market share, cash flow, price-to-earnings ratios, and future earnings gains.
"I look for great companies that are also great stocks," he says.
Portfolios of the three Brady-linked funds overlap somewhat. Each has had a heavy technology emphasis with Microsoft, MCI Worldcom, and Cisco Systems among its Top 10 holdings.
The Young Investor Fund, one of the best-known mutual funds, is geared toward young people interested in learning how to invest. But their parents and grandparents are more often than not the fund's actual investors.
Young Investor was overweighted in small- and mid-cap stocks in 1997 and 1998, which pulled down returns. But Brady and Mr. Gustafson changed their strategy and bought more large, blue-chip stocks. That move helped push fund returns back upward.
In making its management changes last month, Stein Roe closed out what had once been its flagship fund, the Stein Roe Capital Opportunities Fund. Little wonder. It earned less than 2 percent going into May this year.
But the fund, once shareholders approve, will be merged into Brady and Gustafson's Growth Investor Fund. The merger is a common industry practice used to hide a slumping fund.
Russ Kinnel, who follows Stein Roe for Morningstar Inc., calls the Growth Investors Fund a "clone" of Brady's Young Investor Fund. And he doubts Brady will feel any additional pressure as his managing duties increase.
For his part, Brady expects clear sailing for stock funds, thanks to steady growth in both the US and global economic environments.
While he does not "rule out a market correction" in the months ahead, he believes that with low inflation, high employment, and the Asian currency crisis under control, equities markets should continue to expand.
To stay fresh in an increasingly competitive world, companies will have to continue to boost productivity, he says. But that will light a fire under many industry groups, including computers and telecommunications.
If Brady has any reservation about global economic issues, it involves the money supply. He believes that the Federal Reserve Board, under Chairman Alan Greenspan, has been too restrictive in adding to money supply growth. That stinginess, he believes, has kept interest rates higher than they should be and helped produce the liquidity crises in Asia and Russia over the past two years.
Still, his Stein Roe funds, he says, should continue to put a smile on the face of his investors. And, we might add, to the front offices of Stein Roe.
Funds co-managed by David Brady
The Stein Roe funds carry no sales costs and have relatively low expense ratios. Minimum investment: $2,500. IRAs: $500 (800-338-2550).
Fund return YTD 1-yr. 5-yr. annualized
Stein Roe Young Investor 7.1% 15.1% 26.4%
Stein Roe Large Co. Focus 13.7 N/A N/A
Stein Roe Growth 6.3 20.4 23.6
S&P 500 Index 6.6 21.2 25.8
Top fund holdings
Company of portfolio
Large Company Focus
Company of portfolio
Assoc. 1st Cap A 7.8%
Interpublic Grp 6.6
Household Intl 6.4
Company of portfolio
American Intl Grp 5.6
Source: Morningstar Inc. Returns as of 5/26 close; portfolio as of 4/30
N/A: not available