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Yearly Review & Outlook

Fund Managers Position for 2002


For a stock mutual fund manager, beating one's category average was tough in 2000, and tough in 2001. But beating the average both years--amid the longest and deepest bear market on Wall Street in a generation--may be considered a true feat.

In a so-called stock-picker's market, that kind of track record suggests genuine talent in stock-picking.

Here are five fund managers who outperformed their category average, as calculated by Morningstar Inc., by at least three percentage points in both of the last two years, and how they're positioning their portfolios for 2002:


Richie Freeman, Smith Barney Aggressive Growth Fund, in New York: Freeman's fund gained 19.2% in 2000 and lost 5% in 2001, compared with average returns of negative 14% and negative 24% for large-cap growth stock funds overall in those years, according to Morningstar.

Freeman has managed the portfolio from its inception in November 1983. The fund's 10-year annualized return ranks it in the top 1% of Morningstar's large-cap growth fund category.

Freeman said he looks for companies that "can control their own destiny to some extent, whose success is determined by their own products and not the economy."

That focus most recently has led him to more health-care stocks, especially biotech companies. The biotech sector can be highly volatile, but Freeman said he has emphasized profitable companies such as IDEC Pharmaceuticals Corp., Amgen Inc. and Chiron Corp.

"We're interested in dynamic, exciting companies," he said. "We follow trends, not fads, and there's a powerful trend that has to do with treating diseases heretofore untreatable. These are companies that are able to prolong people's lives."

Other health-care holdings in the fund include generic-drug maker Forest Laboratories Inc. and managed-care company UnitedHealth Group Inc.

Though Morningstar classifies Freeman's fund as large-cap growth, he considers it an "all-cap" fund: "We buy them as small- or mid-cap stocks and [hope] eventually they grow larger," he said.

Forest Labs and cable television company Comcast Corp., for example, have been in the fund since its launch 19 years ago, he said.

Indeed, with only about 1% annual portfolio turnover, Freeman is a buy-and-hold adherent. "There's a lot to be said for Warren Buffett's philosophy that the ideal holding period is forever," he said.

In recent months, Freeman has put new cash into existing holdings such as IDEC; into the financial sector, including asset manager Neuberger Berman Inc. and brokerage firm Lehman Bros. Holdings; and into defense contractor L-3 Communications Holdings Inc., "whose business prospects improved, unfortunately, because of the Sept. 11 tragedy."

Freeman believes that investors should take one basic lesson away from the market's initial dive, then recovery, following Sept. 11: "Even if the market seems a little scary, in the final analysis you are buying ... an individual company, and it pays to buy low."


Ken Heebner, CGM Focus Fund, in Boston: Heebner guided this four-year-old fund to a 53.9% gain in 2000 and a 47.6% surge in 2001. Its three-year annualized return of 35.1% is in the top 1% of Morningstar's small-cap "blend" category. Blend funds hold a mix of "growth" and "value" stocks.

Heebner's fund charter gives him broad leeway in running this concentrated fund, which typically holds just 15 to 20 stocks, compared with more than 100 for most funds in this category. He also employs other techniques that may increase the fund's risk level.

In 2000, Heebner cleaned up by "shorting," or betting against, tech stocks whose valuations had gotten out of touch with the companies' earnings potential, he said. Last year he unwound all his short positions by Sept. 30 but has remained light on tech stocks, he said, and has benefited from hefty weightings in the home-building and recreational-vehicle industries.

Home builders such as NVR Inc., Beazer Homes USA Inc. and Ryland Group Inc. have done well as the housing market has remained resilient despite the recession. The same has been true of recreational-vehicle companies Winnebago Industries Inc. and Monaco Coach Corp.

Yet stocks in both industries remain cheap, Heebner said. "Home building used to be a business of hit-and-miss entrepreneurs, but these are established national enterprises, leaders that can continue to grow market share as the industry consolidates," he said of his building stocks.

The fund also has stakes in Frontier Airlines Inc., a regional airline operating from Denver, and in Continental Airlines Inc. The well-known woes of big industry players such as United parent UAL Corp., which recently reduced its capacity in Denver, will benefit the more efficient Frontier, Heebner said.

Though Continental continues to lose money, Heebner believes it is better managed and has fewer labor problems than most of its major competitors.

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