Readers of a recent Acorn Fund quarterly report were greeted with the happy news that Ralph Wanger and Leah Zell had tied the knot.
Wanger runs the Chicago-based mutual fund. His new wife was (and still is) an analyst for the fund`s investment adviser.
”Some of the stocks she follows we have named our `romance portfolio,`
” the new husband informed his investors. Included were Alfin Fragrances
(fancy perfume), Melridge (flowers), Cadbury-Schweppes (candy) and Princeville Development (Hawaiian resort).
As an afterthought, Wanger added: ”We haven`t bought any jewelry or fur coat stocks for the fund yet.”
Certainly, this wasn`t the usual type of message from an investment manager, but then the 51-year-old Wanger isn`t the usual investment manager.
In addition to providing investors with consistently above-average returns, he supplies lessons in sociology, history and common sense–with each lesson made all the more palatable by a dry wit. Indeed, some say that the biggest difference between Wanger and other investment managers is that Wanger is intentionally funny.
”Most mutual-fund writers write an economic forecast of some sort which is both boring and wrong,” Wanger said. ”I`d rather be lively and wrong.”
Wanger notes that when the Acorn Fund was founded in 1970 it needed to set itself apart from the roughly 500 other mutual funds then competing for investors` dollars. Because the fund`s advertising budget was minimal, Wanger opted instead for jokes.
”As a matter of fact,” he continued, ”our advertising budget for the last two years has been $160 each year, which was accounted for by an ad in the program for the New Trier High School drama department–featuring one of the rising stars of the American musical theater, Deborah Jane Wanger (his daughter).”
In general, Wanger shops for stocks of companies that are relatively small, well-run, well-financed and with special niches in the marketplace–in short, the kind of companies with a better than average chance to grow from small acorns into large oak trees.
Many have. A $10,000 investment in the fund in 1970 with capital gains and dividends reinvested would have been worth $117,000 at the end of last year.
In the last 10 years the Acorn Fund has grown on average 23.7 percent a year, compared with the S&P 500`s average gain over the same period of 14.4 percent annually.
For the first quarter, Wanger`s figures show, the no-load fund registered a 13.24 percent gain, about even with the S&P index. The fund currently has more than $320 million invested in more than 100 issues.
Some of those selections have been what Wanger terms ”bacles.” As Wanger once wrote to his shareholders: ”Debacle is an impressive word to describe a stock collapse. . . . However, every debacle had to have been preceded by a long period of rising prices and euphoria. . . . Well, if the collapse is a de-bacle, then the prior rise must be a bacle.”
The search for good investment ideas gets ever more difficult, despite Wanger`s carefully cultivated network of analysts at smaller brokerage houses around the nation.
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”There`s no question that compared to 10 years ago there are more people trying to fish the same river (in uncovering previously unknown small growth stocks),” Wanger noted.
”Sometimes I think the smart thing to do when too many people are fishing the same waters is to open a bait shop.”
Wanger`s basic investment strategy is to identify major technological and social trends likely to hold constant for at least five years, and then find companies situated to take advantage of them. In recent years, that has led the Acorn Fund into four major groups: information, banks, real estate and foreign stocks.
”The computer has changed everyone`s life, and these changes will continue,” Wanger wrote in the most recent year-end report. ”However, the manufacturers of semiconductors and computers have cut the prices of their brilliant inventions time after time, so that a $3,000 computer in 1986 can do the work of a million-dollar machine of 1966.
”This is great for the users of semiconductors and computers, but means that the profitability of making the basic devices has been rather limited. The big profits have been made downstream, by the users of technology, not the makers of technology. . . .
”We prefer to invest in information technology users and avoid companies obsoleted by the new technology.”
One of Wanger`s favorite stocks is Princeville Development, which owns about 11,000 acres in Hawaii and operates a resort and a golf course.
”It`s got the best golf course in Hawaii,” Wanger asserted, noting that Hawaii is a favorite tourist stop for the Japanese, that the Japanese are
”fanatic” golfers and that the value of the dollar has collapsed versus the yen, making travel for the Japanese all that much cheaper.
Other Wanger favorites currently include Catalyst Energy, which develops hydroelectric plants and cogeneration facilities; Triad Systems, which has a niche in providing computer databases for automotive parts dealers; Iomega, which makes a flexible computer disk in a removable cartridge, enabling the user to slip a whole database into a briefcase for easy portability; and U.S. Intec, which is in the decidedly low-tech business of retarring roofs. All, he says, should perform well but are high-risk.
Wanger, however, isn`t so crazy about some new issues, which he says are more hype than high quality.
”Some recent giant stock underwritings have been so complex that they are structured like movie deals, with percentages of the deal carved off for stars with box office attraction,” Wanger told his investors last year.
”The first mega-deal this fall was Rockefeller Center Properties, an overpriced real estate investment trust. This deal was sold like a movie musical with a weak story line–put some dancing girls into the story, and run lots of ads in the newspaper.
”In this case, the dancing girls were . . . the Rockettes, and the ads were stories in Business Week, Barron`s and the Wall Street Journal. Like a
`B` movie, the first-day box office was SRO (the number of shares to be sold by the Rockefeller family was increased because of institutional demand for the stock) but, as the movie people say, `No legs`. The stock came out at $20 but immediately dropped to $18.”
The next mammoth underwriting, Fireman`s Fund, ”sounded like a disaster picture” and ”the plot twist here could have been that there was no fire but the firemen were in trouble,” according to Wanger. He finally settled on the metaphor of an adventure picture, ”which they should have called `Fire Wars.` ”As a hero, they hired Jack Byrne, star of `GEICO,` to play the key role of Luke Underwriter. To add additional investor excitement, American Express
(which was spinning off Fireman`s) then brought in Warren Buffett, the aging star of `The Legend of Benjamin Graham,` in a cameo role as investment strategist, to be the Obi-Wan Kenobi of the insurance industry (`The Sales Force is with you!`).”
Unlike the Rockefeller Center Story, investors bought Fire Wars, Wanger says, and the stock has been selling at a healthy premium over its initial offering price.
”Cinematic spectaculars can be fun movies but flamboyant underwritings are rarely sound investment values,” Wanger nevertheless concluded. ”The Acorn Fund will stick to its policy of owning reasonably priced small companies.
”If the trend toward show biz underwritings continues, when one of our security analysts is asked, `Have you read the prospectus?`, the answer may come back, `No, but I saw the movie.` ”