Money managers out to avoid mediocrity

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

A new investment firm in Florham Park, Von der Linde, Hansen & Co., has several powerful things going for it.

First, the managers — Edward von der Linde and Howard Hansen — ignore the indexes; they pay no attention to how an index that somewhat resembles their own holdings has been behaving.

Some investors pay rapt attention to the indexes — in determining how much exposure they have to certain industries and to certain stocks. If an index has 3% in Exxon and they have only 2%, they begin to worry. What they are really afraid of is that their own portfolio will trail far behind the indexes. Whereas if their portfolio happens just to do miserably, like the index, well, they have a terrific excuse: "Hey, we didn't do much worse than the index!"

Such investors — index-huggers, they're called — are out to protect their jobs.

The managers at Von der Linde, Hansen know that an index can be misleading. It can be over-weighted in certain industries and stocks, and under-weighted in certain industries and stocks. That's one reason why copying an index is not a great way to make big bucks. You think Warren Buffett wants Berkshire Hathaway to adhere to an index? If Buffett had actually been a mere index-hugger, you would never have heard of him. He'd be Warren Who?

As von der Linde and Hansen put it, they want to create an investment portfolio "unconstrained by artificial limitations." Like obsequiously following an index.

They also are not big advocates of diversification. Investors who diversify like mad will, obviously, wind up with a big exposure to losers as well as winners. ("Diworsification" is what Fidelity's Peter Lynch called it.) Following an index is, of course, the royal road to diversification --- and mediocrity.

Von der Linde and Hansen are, naturally, value players. They look for stocks that have been beaten down, trampled, crushed, left for dead. And they carefully check to see if there's any faint signs of life, any chance of the stock's reviving. One clue: capable new management. First, because those guys (or gals) must see a possibility of revival; and second, because they might just have the smarts and gumption to do what's necessary.

Why are von der Linde and Hansen, "naturally," value players? Because that's where the big money has been made. If academicians have actually proved anything at all about investing, it's that cheap, value stocks over time have soared far past high-priced, growth stocks.

Another advantage of buying seemingly cheap stocks: You don't have high expenses because of frequent trading. You hold on and on, waiting for the stock to turn around — or for investors in general to recognize that that ugly duckling is really a not-bad-looking swan. Von der Linde, Hansen tends to hold stocks for two years.

Being a value player has drawbacks, alas. You must be good at detecting faint signs of a pulse in a moribund stock. (As Marty Whitman, a noted value investor, has said, a stock that remains a bargain was no bargain.)

You also must have sophisticated investors, not summer soldiers who desert at the first sign of frost. Von der Linde, Hansen will accept new accounts of $1 million or more, although investors working with registered investment advisers may be able to sign on at a lower level. And the two don't give advice about insurance, taxes, college aid, asset allocation, and all that stuff. They aren't financial planners. They're just money managers.

They sum up their philosophy this way: "Investing free of inhibitions such as predetermined stock and sector weightings, common to benchmark sensitive managers, enables the construction of pure, actively managed portfolios focused on long-term value investing."

And yes, since you ask, they have good credentials. They have over 50 years of combined experience as value investors and a history of managing multi-billion dollar portfolios. Until they launched their money-management company last year, they managed mid-cap value strategy for Lord, Abbett & Co., which reached $16 billion at its peak and included the giant Lord, Abbett Mid-Cap Value Fund, which still has a high Morningstar rating.

By the way, they have most of their own money invested in their portfolio.

In looking for good stocks, they focus on normalized earnings power — what the company might earn if it reverted to its old winning ways. They will hold 20 to 40 stocks, but typically 30. Usually they concentrate on mid-sized and small companies. Or, as von der Linde puts it, a big-cap company becoming smaller. (Because its price has nosedived.)

If a stock seems to be getting overvalued, they won't throw it out altogether — but begin selling it in pieces. Too many investors, says Hansen, who is a Certified Financial Analyst, never want to sell a winning stock. "They feel that they can never get rich enough."

Von der Linde and Hansen aren't gunslingers, overeager to embrace risk. They won't normally have more than 5% of their assets in one stock, no more than 20% in one industry.

Their fee: 1% of assets under management, which is typical.

"Well, how about some names?" One they like is Boston Scientific, which has a new CEO. "It's a solid technology performer, with a good cash flow," says von der Linde. Kimberly Clark, the maker of Kleenex, Kotex, and Huggies, is another. "Cyclical pressures and concern over raw-material input costs have pushed the stock to historically low valuations. With a 4.3% dividend yield, good management, and strong brands, what's not to like about KMB?" asks Hansen.

Both men are optimistic about the stock market, I am happy to report. "We're bullish about the next five, ten, and 15 years," says von der Linde.

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