Michael Sandler
Clipper Fund
by Marla Brill
MFI Publisher
Part II - Click here
for Part I
 Few
Bargains Around
With technology stocks so battered, some value fund
managers are starting to edge into that territory, even if they haven’t set
foot there in years. Not Sandler and the Clipper team, whose fund last owned a
technology stock six years ago.
"Yes, tech stocks have landed with a thump," he
says. "But they are down from valuations that were off the charts. These
aren’t necessarily bad businesses, but their stocks just aren’t cheap
enough."
In fact, says Sandler, there isn’t much out there that
fits Clipper’s bargain basement buy criteria. Last year about this time,
Clipper’s managers were loading up on Philip Morris, Freddie Mac, and other
stocks that looked cheap. That brought the fund’s cash position down to 22
percent—high by most mutual fund standards, but fairly narrow for this fund,
which always keeps an ample cash cushion on hand.
Now standing at 34 percent of assets, that cushion has
turned into a couch. Late last year, Clipper’s managers began paring back on
some stocks that had had a good run-up, including Tenet Healthcare, Allstate,
and Nike. By then, the world had discovered the virtues of value stocks, making
them pricier than Sandler was willing to pay. So he put some of the money from
those stock sales into cash.
"When a stock becomes fully valued, we’re not
afraid to sell it. And when we can’t find anything we want to buy, we’re not
afraid to let our cash position rise. And really, there is not much out there we
find attractive right now. The largest losses have taken place in the stocks
that were most unreasonably priced. That’s made them cheaper than before, but
not cheap enough to buy."
Sandler insists that the fund’s propensity for taking
big cash positions is not the same as timing the market. "Timing the market
is when someone tries to predict short-term market swings, which isn’t our
goal here. The fact that there’s a high cash position in Clipper just means we
can’t find companies that fit our valuation parameters."
Moving into cash, however, isn’t an option in Clipper’s
sister fund, the $250 million UAM Clipper Focus. While both funds have the same
investment philosophy and approach, and generally own the same stocks, UAM
Clipper Focus keeps all but about 5 percent of its money in equities at all
times. The managers compensate for the lack of cash by holding proportionally
larger asset weightings in each name.
Launched in 1998, UAM Clipper Focus is the more aggressive
and volatile of the two funds, says Sandler, because it doesn’t have a
fixed-income component to help smooth out the stock market bumps. Still, in
terms of a risk-reward profile, this is more of a spicier Clipper than a Clipper
on steroids. When the stocks in the two funds are doing well, UAM Clipper Focus
will rise a bit more than Clipper, but drop more noticeably in bear markets.
Last year, for example, Clipper and UAM Clipper Focus rose
37 percent and 44.3 percent, respectively. In the last quarter of 1998, a
bearish period, the firm’s institutional accounts that correspond to the
investment strategies of Clipper and UAM Clipper Focus fell 1.4 percent and 4.7
percent, respectively—both well below the S&P 500 Index’s 10 percent
drop.
Sandler says financial advisors don’t necessarily
gravitate to one or the other. "You’d think they’d prefer Focus because
it fits more neatly into asset allocation models, but that isn’t always the
case," he says. "I think there’s a class of advisors who like funds
with a fully invested posture. But there is also a large group that prefers
Clipper’s lower risk profile and lower turnover." Some may prefer Clipper’s
lower expense ratio of 1.09 percent, compared to 1.4 percent for UAM Clipper
Focus. Sandler says the latter fund’s expense ratio is higher because it is
available through no-transaction fee programs at discount brokerage firms.
Sandler thinks that the market will continue in a downward
pattern over the next couple of years, and is positioning the fund defensively
by beefing up positions in companies he considers best prepared to weather an
economic and market slowdown. In the real estate investment trust sector, his
largest holding, Equity Residential Properties Trust focuses on apartments
because "people always have to live somewhere." The fund also added to
its position in McDonald’s a few months ago. Even though the burgermeister’s
stock has fallen nearly 15 percent since the beginning of the year, Sandler is,
characteristically, keeping the faith. "The weak Euro hurt earnings last
year and monthly restaurant sales have been lumpy," he says. "But over
the long-term, it’s the company’s great franchise that really counts."
Clipper Fund Facts
Inception date: 1984
Expense ratio: 1.09 percent
Assets: $1.4 billion
Average weighted market capitalization: $27.027 billion
Turnover rate: 45.6%
Top five holdings: Freddie Mac (7.2%), Philip Morris
(6.7%), Staples, Inc. (3.9%), Equity Residential Properties Trust (3.3%), Fannie
Mae (3.3%)
Source: Clipper Fund
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