EX-DENTIST TRIES TO DAM LINDNER FUNDS’ OUTFLOWS: TURNAROUND LIKE PULLING TEETH

These days mutual fund managers who invest in small-company value stocks are being hit with a double whammy.

Focusing on two such out-of-favor investing styles has battered the St. Louis firm that manages the Lindner funds. Since yearend 1997, it has seen assets in its seven portfolios shrink by more than half – to $1.4 billion from $3.2 billion.

Directors have wrested daily fund management from president Eric Ryback and brought in outsiders. They’ve let go four managers and two researchers. They’ve also changed the company’s name from Ryback Management Corp. to Lindner Asset Management Inc. – better reflecting its foundation by Kurt Lindner in 1954.

Mr. Ryback remains president, and will share corporate strategy and investment policy decisions with chairman and chief executive Doug T. Valassis and Mark T. Finn, vice chairman and chief operating officer.

The family of Mr. Valassis, a former dentist, is among the company’s major shareholders. Mr. Finn, who founded his own money management firm in Virginia Beach, Va., was hired in late April.

They will serve as an investment committee that screens stocks selected by a research team headed by Jeffrey D. Fotta, also hired in April. He was named vice president and director of research for the Lindner funds.

Mr. Fotta was founder of Ernst Institutional Research in Boston, where he helped build quantitative models for portfolio managers. He and Mr. Finn will work out of Boston and Virginia Beach, respectively.

Dave Haywood, an analyst with Boston-based Financial Research Corp., says of the Lindner funds, “They did quite well for some time, but now they’re kind of falling apart.”

A big reason is the company’s specialty. Investors’ love affair with large-company growth stocks has creamed a lot of mutual funds investing in small company value stocks. The Russell 2000 declined 16% over the 12 months ending March 31, and the Wilshire Small Value Index lost 22.6% over the same period.

“You put bad relative performance on top of that, and you have a drastic decline,” says Mr. Finn. He calls the current market environment “cyclical,” predicting that “value will certainly come back.”

The other part of the story lies in Lindner’s ironclad rules about what constitutes a value stock. Its two mainstay funds – Lindner Growth and Lindner/ Ryback Small-Cap, lost 30.2% and 17.4%, respectively, over the 12 months ended March 31, and Lindner Dividend Fund lost 13.6%. A fourth fund, Lindner International, lost nearly 40% in the same period.

Mr. Ryback, who has been with the company since 1982, purchased it from Mr. Lindner in 1993. The founder had refused to buy stocks with a price-earnings ratio higher than 10. Mr. Ryback gradually adjusted that upward into the 20s. Still, this has kept the funds from grabbing stocks with high growth potential.

“In the old days of the Lindner model, there was an absolute limit,” says Mr. Finn. “I can’t say we’re raising p/e limits, but we want to look at price-earnings ratios relative to the industry they’re in.”

He adds the company is building new cash-flow and risk-control models into its stock selection.

In the company’s earliest days, Mr. Lindner, a German refugee, was known for his thrift, refusing to buy advertising, computers or Quotron machines. He would gather closing stock prices by sending underlings out to local brokerages. Returns were calculated on yellow legal pads, and the company did not provide investors with a toll-free telephone number until well into the 1990s.

Mr. Ryback, an avid hiker who chronicled his adventures along the Appalachian Trail and the Continental Divide in a 1960s book, is largely credited with bringing the company into the modern era. After taking over in 1993, he increased the number of funds while bringing in modern conveniences.

Now he has been kicked upstairs. The move, he says, “will free me up to do what I used to do, and that is coming up with new ideas, and passing judgment on other ideas.”

Three-year and five-year returns are -2.1% and 4.8% for Lindner Growth and 10.5% and 13.1%. for Lindner/Ryback Small Growth, gaining it fans among institutions and independent financial advisers. Over the same periods the Lipper Small-Cap Index returned 4.8% and 12.8%.

“This is a great fund family with a great history,” says Mr. Finn. “We’re going to turn these funds around.”