Fund managers: The old ways won't work anymore

BOSTON -- There are plenty of lessons to be learned from last year's financial meltdown, whether you're an individual investor building a retirement nest egg or a mutual fund manager trying to maximize returns.

It's more complex for managers, who've got clients to satisfy. Tanking markets could send nervous investors rushing to cash out, just as an abundance of values emerge. Managers have to return clients' money, which can mean passing up on the good buys and selling into a falling market to meet redemptions.

The past year's market turmoil left managers striving to rebound from humbling experiences, and searching for new ways to operate in a market that may be changed forever.

Here, two fund managers and one bond strategist with nearly eight decades of collective investment experience share their perspectives:

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ROBERT TURNER, chairman and chief investment officer, Turner Investment Partners: As an expert in technology stocks, Turner had no inkling that one of his favorites, Apple Inc., could tumble so steeply with the rest of the market even as the company seemed to be humming along.

"Apple had its best operational year in history last year with the launch of the iPhone 3G," Turner says.

But Apple's stock started 2008 just under $200 a share, and ended it at just $85. This year Apple has been a star, its stock back up to nearly $185.

So what drove the price down so sharply? In part, it was something Turner hadn't accounted for: A recession rooted in the subprime mortgage crisis triggered events that reverberated to seemingly remote areas like technology. The credit crisis became so pervasive that hedge funds and many institutions were cut off and suddenly looking for cash to meet obligations to investment clients, pension plan participants and university operations.

Often, that meant selling favored stocks, like Apple, which sent stock prices reeling regardless of the underlying company's operational health.

"We were getting calls just like other equity managers: 'We're going to take $20 million out of the portfolio,'" Turner says. "They knew they were probably taking it out right at the bottom of the market. But they had to pay pension plan participants, or had to pay the university."

The forced sell-off also extended to normally recession-proof companies like surgical supply manufacturers that could no longer sell to hospitals suddenly unable to secure credit.

At Berwyn, Pa.-based Turner, the painful experience led to a greater emphasis on big-picture economic trends -- the kind of forces that can pull down a stock regardless of the company's fundamentals. Each Thursday, Turner's investment team leaders gather to consider strategy, with a greater focus on the broader impact of any economic storms that may be brewing.

That's a new way of thinking compared with March 2007, when Turner Investment Partners published a research paper titled "Subprime Mortgages: Way Past their Prime" -- suggesting early troubles would balloon.

But back then, Robert Turner didn't see a connection to technology.

"We never had a discussion of, 'Well, what does this mean to tech? What does this mean to health care?'" he says.

Now he knows.

"The macro influence will dwarf individual stock situations," Turner says.

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TONY RODRIGUEZ, head of fixed-income strategy at First American Funds: It's hardly breaking news that China is looming larger on the world economic stage. But China's strength has become even more apparent after the meltdown.

Lately, Rodriguez finds himself considering China's next moves more frequently as he devises bond strategies heavily influenced by global growth expectations. Not so long ago, he concentrated much more heavily on U.S. markets.

"It never used to be that you would look to China as a potentially significant contributor to the pace of recovery from a global recession," Rodriguez says. "Now, people cite them as being the main engine of recovery."

Rodriguez is also paying more attention than ever to underwriting -- the draining task of looking deep into a company's finances in search of the credit risks and liquidity troubles that created so many unpleasant surprises in the meltdown.

Had investors done more research into Lehman Brothers, its fall wouldn't have been nearly so sudden, or might not have happened at all.

"The crisis just really highlighted exactly how severe a haircut you can have if you get it wrong," Rodriguez says.

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CHARLES DE VAULX, fund manager and partner, International Value Advisers: A former credit analyst, de Vaulx knows how to uncover risks. He demonstrated that skill after his biggest fund's launch in October. IVA Worldwide gained nearly 3 percent by the end of the year while broader markets lost more than 20 percent.

DeVaulx came away from the meltdown astounded at the market's seeming inability to recognize problems at companies like Fannie Mae, Freddie Mac and Lehman Brothers until they were on the verge of collapse. That goes for many value-oriented investors who seek out stocks that are cheap relative to their typically steady earnings.

"A lot of the value guys got caught with their pants down because four or five years ago, they couldn't find anything that was both cheap and safe to buy anymore, " says de Vaulx, himself a longtime value investor. "So they said, 'Oh, let's forget about the safety part.'"

Too many companies' growing debt loads were ignored, de Vaulx says.

"I think the big lesson is to relearn the importance of a strong balance sheet," de Vaulx says. "The concept of risk -- and having too much leverage, and what it can do to you -- was totally forgotten."

When de Vaulx's firm interviews candidates to become market analysts, de Vaulx seeks out the ones who emphasize the potential risks from an investment move just as much as the rewards. Typically, however, the majority emphasize the latter, he says. Investors shouldn't fall into the same trap.

"Ask lots of questions about what can go wrong," de Vaulx says. "Will that mean you will commit lots of sins of omission, and you will miss great stocks? Absolutely. And that many of your imagined risks won't materialize? Yes. But, boy, it will be nice to avoid the disasters."