CLIPPER STEERING STEADILY SOUTHWARD: IT’S A ROCKY COURSE FOR A VALUE BELIEVER

With financial stocks down and cigarette makers battered by lawsuits, the once-stellar Clipper fund seems all at sea.

The fund, long known for solid performance, had declined 5% this year through last Wednesday, vs. a -0.08% return for the average large-cap value fund. The $1.2 billion fund gained 11.55% for the 12 months ended Sept. 30 and 17.68% for the three-year period, according to Morningstar Inc., the Chicago-based fund tracker.

Pacific Financial Research, the fund’s adviser, insists redemptions have been “modest.” A spokesman at Boston-based United Asset Management, which bought Pacific Financial Research in 1997, says the company is not worried about cash flows, which totaled $60 million in the first three quarters.

“If you’re a value investor in a period of irrational exuberance, it’s a frustrating period,” says James Gipson, who started Clipper in 1984 and co-manages it with Bruce Veaco and Michael Sandler.

Though Mr. Gipson chalks his weak returns up to the astronomic gains of growth stocks, calling it just “a small rough spot,” he has been trailing even value indexes for more than three years. Clipper hasn’t beaten the largest 200 stocks in the Russell 2000 value index since 1995.

More than 80% of similarly managed funds are outperforming Clipper. Over the three-year period, the fund is being beaten by 60% of its peers, according to Morningstar.

Over the long term, though, Clipper has sailed on to fairly impressive performance, in the top 20% for the 10-year period and in the top 15% for the five-year, according to Morningstar.

What’s behind the fund’s latest troubles? Try a 30% cash position and a big bet on financial stocks.

Looking through Clipper’s top holdings is like surveying a list of stock market casualties.

“If Microsoft and Amazon is everyone’s idea of sexy stocks, then Fannie Mae and Freddie Mac are about as unsexy as you can get,” Mr. Gipson says about the stocks he is buying.

Fannie Mae, the government-sponsored mortgage lender and guarantor, makes up 9.8% of the fund’s holdings. Savaged recently by rising interest rates, the stock was down 11.15% through Wednesday. Rival guarantor Freddie Mac has been beset by similar problems and was down 22.76%.

Mr. Gipson is also being punished for putting 7.2% of the portfolio in Philip Morris. Thanks to a spate of state lawsuits, the cigarette maker’s stock was down 50% this year through last Wednesday.

busily buying

While most money managers would be running scared, Mr. Gipson wants more. So enamored is he of out-of-favor stocks, he is considering plans to buy shares of Berkshire Hathaway, Warren Buffett’s lately battered holding company of financials and consumer goods outfits — down about 20% this year.

“I believe shareholders are well-served in this fund,” he says.

Even so, Mr. Gipson’s adherence to deep-value investing isn’t painless. Late last year, he and his partners sold off their complete holdings in Wal-Mart Stores Inc., believing the stock had reached its full value. This year, however, Wal-Mart’s stock had climbed 30.59% through Wednesday.

“(Mr. Gipson) is rigid in both his buying and selling,” observes Christine Benz, a senior analyst with Morningstar.

Despite the lackluster performance, advisers who use Clipper remain loyal to Mr. Gipson and his team.

“Managers like Jim Gipson should be applauded for sticking with their style during this period,” says Chris Hauswirth, a principal with San Francisco’s Wetherby Asset Management.

Lewis Altfest, a New York adviser supervising $100 million, says though he left the fund several years ago due to asset reallocation, he is still a fan of the value style that Mr. Gipson and his team espouse. That’s why Mr. Altfest likes the Clipper Focus fund, a fully invested, much-smaller clone of the Clipper fund that is suffering a similar fate. How does he explain Mr. Gipson’s underperformance? “The guy doesn’t like this market,” he says.