High hopes for small stocks

Five months and thousands of details after its co-founders left Strong Capital Management Inc., the Artisan Small Cap Fund is a reality.

Nationally known money manager Carlene Murphy Ziegler's small-company stock fund will be open to investors Monday. Ziegler and her husband, former Strong President Andy Ziegler, see Artisan Small Cap as the foundation for what they hope will become another high- performance Milwaukee-based mutual fund company with a national presence.

Although the Zieglers haven't disclosed the amount of financing they have, they say it is enough to fund their vision. So the big variable for investors is how Artisan Partners' flagship fund will perform.

Andy Ziegler, managing partner at Artisan Partners, compared starting a new mutual fund to building a race car. "You can have great suspension, aerodynamics and everything else but without a great portfolio manager, it's like having a Volkswagen engine in it," he said.

Analysts are unwilling to predict whether Carlene Ziegler will be the kind of top-performing engine Artisan Small Cap needs to attract a strong following. But they'll certainly be watching.

Carlene Ziegler plans to buy stocks for Artisan Small Cap using the same blend of growth and value styles that produced total returns of 100% for the Strong Common Stock Fund and 75% for the Strong Opportunity Fund during the 2 1/2 years she co-managed those funds with partner Dick Weiss.

"Starting a fund is like jumping onto a merry-go-round. A lot has to do with your point of entry," said A. Michael Lipper, president and chief executive officer of Lipper Analytical Services in Summit, N.J. Lipper believes a fund's first-year performance is often more a function of the market than the portfolio manager's skill. So the best time to jump in, according to Lipper, is at market bottoms.

But Artisan Small Cap is starting after several weeks of record highs in the market. Even so, Lipper said, "I think it's a good time to start a fund but this is a contrarian view."

Elizabeth Bramwell, former manager of the Gabelli Growth Fund, started her flagship fund, Bramwell Growth Fund, last August when the market was turbulent. The fund now has $35 million in assets and returned nearly 12% through March 31.

Leg 1 ends here "Carlene has a great record, and there should be a lot of interest in this fund," Bramwell said.

Ziegler achieved her great record, however, with Weiss. She began her career as Weiss' research assistant at SteinRoe & Farnham in Chicago. After moving up to portfolio manager, she continued to work with Weiss, moving with him to Strong. The question many observers are asking is whether Ziegler will be able to repeat the success on her own.

"It's really hard to say at this point, not having been fortunate enough to be a fly on the wall and see how the fund managers interacted," said Larry Chin, associate editor of the No-load Fund Analyst, a mutual fund newsletter published in Orinda, Calif.

Ziegler and Weiss were a very effective team, said Marshall Front, who was president of SteinRoe when Ziegler and Weiss worked there. He is now managing director at Trees Front Associates, a Chicago investment firm. "But if hard work, intelligence and vast experience count for anything, they should both do well on their own," Front said.

Ziegler said she bought 25% to 30% of the $2.5 billion in domestic stocks she, Weiss and Marina Carlson managed at Strong. Weiss and Carlson now co-manage the Strong Common Stock and Strong Opportunity funds.

Strong representatives declined to comment for this article, but Chin thought Ziegler's estimate probably was accurate.

Ziegler's investment approach often is referred to as "growth/value blend." She incorporates strategies of growth investors, who buy stocks of companies with better-than- average earnings increases and are expected to continue to have high profit growth. But Ziegler also uses some tactics from value investors, who tend to buy out- of-favor stocks whose prices are in the lower end of their trading range.

Chin thinks Ziegler's investment approach is almost identical to that of former co-managers Weiss and Carlson, but he sees a slight difference. "Carlene might be a little more growth-oriented, whereas Dick and Marina's style might lean in the value direction," Chin said.

Ziegler invests in some companies with market capitalizations of $60 million to $900 million that don't have a lot of analysts following them. Market capitalization is calculated by Leg 2 ends here multiplying the number of a company's outstanding shares by the current price of a share.

Ziegler said most of her stocks, though, have market caps in the $100 million to $500 million range. An example is Milwaukee's Marcus Corp., which has a market cap of about $350 million. Ziegler recommended it in early January when she became the one of a few women to participate in the Barron's Roundtable.

Marcus, which runs hotels, restaurants and movie theaters, has sales that are growing at 15% a year, but Ziegler thinks its stock is cheap. Marcus' price-to- earnings ratio is 13, based on May 1996 earnings, below the market average of about 15 for the same period. Investors use the P/E ratio calculated by dividing the price of a stock by its earnings to determine the price they are paying for a company's earning power.

Ziegler also likes companies with stock prices that she believes don't fully reflect the value of their underlying businesses. She tries to buy those stocks when she sees catalysts that will propel the stock price higher.

For example, Ziegler foresees a catalyst for Puritan-Bennett Corp., a leader in respiratory therapy that makes and sells home respiratory equipment and hospital ventilators. Last fall, Puritan-Bennett's board of directors rejected an unsolicited takeover offer for $24.50 a share. Angry shareholders are threatening a proxy fight at the annual meeting in June, so management is cutting costs and reducing discretionary spending to prove to investors that rejecting the offer was the right thing to do, Ziegler said.

She calculates Puritan-Bennett's private market value at about $32 a share and believes earnings growth is accelerating because of management's cost- cutting moves. Ziegler thinks the company should be able to earn $2 a share, compared with $1.35 a share in 1994.

"At $23.62 1/2 a share, the company is cheap, based on this year's earnings if they make $2 a share," Ziegler said. She is buying this stock for Artisan Small Cap.

Ziegler expects Artisan Small Cap to have a lower percentage of cash and foreign stocks than her Strong funds did. At Strong, international stock portfolio manager Anthony Cragg makes stock recommendations for the foreign stocks in all funds.

Ziegler also said Artisan probably would hold more Leg 3 ends here small-company stocks than her Strong funds did because it will never get as big.

"Carlene might have a small advantage because she'll cap her fund at $300 million," Chin said. She also has the advantage of being a known quantity in the mutual fund world, he said.

Chin likes managers to have at least three years of quantifiable results behind them.

"Carlene has a background we can be comfortable with," he said.

Still, Ziegler has always managed her funds while working for big firms with large research staffs. Front and Lipper both think another question involves how well she will do in a small organization.

"There's a great difference between being a good fund manager and a good researcher," Lipper said. He believes stock researchers often are better at judging when stock prices warrant further consideration.

Lipper also thinks researchers are good at digging up stocks beyond the fund manager's favorites. Ziegler will buy 25 to 30 stocks for the Artisan fund initially, and work up to between 50 and 70, she said.

"It's easy to have six or seven securities you like, but the rest those are the ones that can come back to haunt you," Lipper said. "There's also always the chance some of your favorites will turn on you."

Don Phillips, publisher of Morningstar Mutual Funds in Chicago, thinks technological advances have diminished the difference between large and small firms.

Ziegler will have access to all the outside research she did at Strong and SteinRoe because Artisan is subscribing to data feeds that provide it, she said. Also, she has hired Millie Adams Hurwitz, former co-manager of the SteinRoe Prime Equities Fund, as a research analyst.

Hurwitz began her career as Ziegler's research assistant at SteinRoe.

"Her first job was working for me, so stylistically we're on the same wavelength," Ziegler said.

Lipper said he wouldn't let concerns about Ziegler working out of a smaller firm stop him from investing in Artisan Small Cap.

"The nice thing for the investor is that you don't have to put a lot of money in," he said. Lipper said investors who know and like Ziegler's style could commit a small amount of money to Artisan Small Cap, then add to that position if Ziegler Leg 4 ends here performs well.

Investors in the fund probably would be allowed to add to their stake even after it closed, Lipper added.

Weiss' Strong Common Stock Fund is closed to new investors, so Artisan Small Cap is a good way to get into a fund that buys smaller companies, Phillips, of Morningstar, said.

But what happens if the market takes a downturn and Artisan Small Cap gets stuck in low gear? If Ziegler isn't among the top performers, will investors and the company's financial backers bail out?

"We understand that we're backing one person with one style, and the world can be, for short periods of time, very hostile to one style," said Matt Barger, a partner at Hellman & Friedman in San Francisco.

Barger is part of a private investor group composed of 12 partners and employees of Hellman & Friedman, an 11-year-old San Francisco investment banking firm. The firm has backed several major US money management firms.

Artisan's other backers include:

{} Sutter Hill Ventures, a firm in Palo Alto, Calif., that is the oldest venture capital firm on the West Coast.

{} Arthur Rock, an independent venture capitalist in San Francisco and a seed investor in Apple Computer Inc. and Intel Corp., among other companies.

{} Jack Byrne, former chairman of Geico Corp. and Fireman's Fund, through the Byrne family trust.

Investor capital will finance two years of operations, and financing is built in for the first few money-management team hires, Andy Ziegler said. He plans to hire three to five additional portfolio management teams over the next three to five years. Each team would manage mutual fund and private investor money.

Ziegler expects to begin looking for another portfolio management team in the second half of 1995, and is leaning toward an international stock fund, an international bond fund or a U.S. stock fund with an investment style that differs from Carlene Ziegler's.

For information about the Artisan Small Cap Fund, call (800) 344-1770.

Copyright 1995
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