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Shining a Different Light on Fund Returns

The editor of Value Line's other research service, a competitor to Morningstar, offers a few tips to investors.

November 17, 1998|RUSS WILES

Value Line has for decades been a respected name in stock research, but it remains a relative unknown in the mutual-fund-rating business.

Since launching a fund rating service five years ago to compete with that of Morningstar Inc. of Chicago, Value Line has struggled in its competitor's shadows. Value Line won't disclose the number of subscribers for its fund-rating publication and software, but it clearly trails Morningstar in visibility.

Steve Savage is trying to change that. He's the 37-year-old executive director of the Value Line Mutual Fund Survey and executive director of the company's electronic publishing operation.

A native of upstate New York who earned an English degree at Hunter College in 1983, Savage broke into the financial business as a writer for the Money Reporter investment newsletter. He then moved to CDA Wiesenberger, a fund-monitoring firm for which he helped to build a computerized operation.

He joined Value Line in 1993, and now heads a staff of 35, including about 20 fund analysts.

Savage, based in New York, was interviewed by Russ Wiles, a mutual fund columnist for The Times.

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Times: Let's talk first about the Value Line stock rating service, for readers who may not be familiar with it. Your rating of individual stocks on a scale of 1 to 5 far predates Morningstar's creation of its 1-to-5 mutual fund rating service.

Savage: Value Line's stock research is unique in that we organize all of our investment information onto a single page. That's the format the company was built on.

People don't realize that Value Line, with coverage of 1,650 stocks, follows about 50% more companies than even Merrill Lynch. To our knowledge, nobody else comes close to providing the depth of research on such a broad universe of companies as we do.

Our analyst commentaries are unique, and we perform a series of earnings estimates for each company to determine whether that stock might be a good choice for appreciation.

And we have a "timeliness" ranking system, which has been audited and verified countless times by academics and by the Hulbert Financial Digest. Our track record has been superb.

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Times: What traits do your top-rated stocks tend to have?

Savage: Ours is a momentum-driven system. The factors incorporated into our model are earnings growth, earnings acceleration, stock-price momentum and various analyst estimates.

The stocks we rate "1," or highest, have been performing well and tend to be higher-beta stocks [i.e., they are more volatile, up and down, than the market average].

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Times: So despite the name "Value Line," your system doesn't focus on bottom-fishing or bargain hunting in the classical sense for undervalued stocks?

Savage: No. It's not a value system, although subscribers can find plenty of information to use in whatever way they like.

For example, our three- and five-year appreciation projections tend to be higher for companies that are undervalued now.

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Times: How often is the information updated?

Savage: Coverage is over a 13-week cycle. A new set of reports is issued each week, and the entire set is updated once a quarter, when the cycle begins again.

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Times: How do your roughly 70 stock researchers go about collecting information?

Savage: There's a lot of number crunching to their jobs, in that they make a lot of adjustments to the financial data released by companies. Value Line is very highly regarded for its analyst training program. Many top professionals on Wall Street have, at one point in their careers, been analysts at Value Line.

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Times: Now let's focus on your mutual fund service. As with stocks, you rank funds on a scale of 1 to 5, with 1 being the highest rating. But are the fund rankings supposed to predict the funds that will fare best going forward?

Savage: We do not claim that our ranking system is predictive. But it is useful because it gives you a quick measure of how a fund balances risk and reward relative to other funds within its group.

Morningstar describes its star ratings not as predictive but as a first cut. I disagree. I don't think ratings should be viewed as a first cut. Your first cut should be to determine which types of funds you want and how you're looking to combine them in a portfolio. Then the rankings become important because they can help you identify those that have done better within the various categories.

The biggest error I see is that people spend a disproportionate, even unreasonable, amount of time analyzing individual funds without considering how a fund might fit into an overall portfolio. A portfolio is not always the sum of its parts. It can be quite different. When you add a fund to a portfolio, its individual characteristics may become completely irrelevant.

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Times: A lot of investors may be confused by that. Can you explain?

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