Chet Currier—Out-of-Favor Stocks Regain Their Luster as Market Turns

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For proof that patience really can pay off in investing, we offer the story of the Fidelity Low-Priced Stock Fund.

Bloomberg News last visited the fund’s widely respected manager, Joel Tillinghast, in January 2000, and found him disconcerted. His investors weren’t dancing for joy either.

Fidelity Low-Priced was coming off two bad years in a row. Assets in the fund had shrunk to $6.5 billion huge by the standards of the typical small-stock fund, but barely half their peak a couple of years before. Not the sort of showing that solidifies your standing around the Boston offices of Fidelity Investments, the biggest of all fund management firms.

After a decade of success picking out-of-favor stocks, Tillinghast’s style had gone, well, out of style. The fact that many other hard-nosed “value” investors were wrestling with the same problem provided small consolation. “It’s been frustrating and stressful,” he said.

But as he spoke those words, market conditions were about to change. In the next several months, the computer and telecommunications stocks that sticklers like Tillinghast shunned as risky and overpriced toppled from the sky. The less glamorous stocks he favors started to rise from the mud.

Fidelity Low-Priced finished 2000 with a 19 percent return, trouncing the Standard & Poor’s 500 Index, which was down 9.1 percent for the year, by 28 percentage points.

On the mend

That was an even wider margin than the 22 percentage points by which the fund’s average returns trailed the S & P;’s annual performance over the two preceding years. The fund’s assets recovered modestly as well, to $6.8 billion.

“Low-Priced Stock delivered in spades last year,” said Eric Kobren in his independent newsletter Fidelity Insight. “A dramatic turnaround in market sentiment,” the 45-year-old Tillinghast acknowledged in his yearend commentary.

“My ideas are no longer obsolete,” the soft-spoken manager said in an interview. “Right now some cash is coming in, which is a relief.”

Investors who stuck with the fund reaped some nice rewards. Even with a gain of less than 1 percent in 1998 and just 5.1 percent in ’99, Low-Priced’s annual return for the last three years came to just under 10 percent, outstripping the most popular small-stock yardstick, the Russell 2000 Index, by almost 3 percentage points.

The fund’s annual return for the past five calendar years hit 14.9 percent, 4.5 points better than the Russell 2000. Tillinghast’s performance since the fund opened in 1989, which had consistently outpaced the S & P; 500 until it fell behind in early 1999, pulled ahead of that big-stock index once again.

In early 2001 through yesterday, Low-Priced has continued to shine with a gain of 7 percent, more than doubling the S & P; 500’s 2.7 percent return.

“Fidelity Low-Priced Stock Fund finally caught a break,” said Scott Cooley, an analyst who follows the fund for the research firm Morningstar Inc. in Chicago. “Tillinghast is not only one of the most experienced managers in the (small-company value) group, but one of the best.”

Adding tech

As 2001 began, the fund had 15 percent of its assets in financial stocks, 12 percent in technology and a shade less than 10 percent in health care. After the tech wreck of 2000, “I added a bunch of technology companies in the fourth quarter,” Tillinghast reports.

The largest individual holding at yearend was the Class B shares of Universal Health Services Inc., an operator of hospitals and other medical facilities, which more than tripled in 2000. Second biggest: Biomet Inc., a producer of orthopedic devices and surgical instruments, which posted a gain for the year of 49 percent.

Where to from here? It’s a bit much to expect a fund as big as Low-Priced to run like a speedboat. A large asset base is a special problem for managers in small stocks, which aren’t as easy to buy, sell or hold in substantial quantity as blue chips are.

“With its assets spread across more than 700 stocks,” says Cooley, “this fund is unlikely to blow its rivals out of the water in any given year. But Tillinghast has shown that he can steer this huge portfolio to decent relative returns.”

He also makes a pretty good poster boy for the long-term approach to investing. With some problems of money management, patience may be the only cure.

Chet Currier is a columnist for Bloomberg News.

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