One on One: "Investing in funds that have an outstanding record is death"

Boosting assets under management in a shaky stock market is difficult for anyone, but that’s exactly what Lewis J. Altfest is doing.

The 60-year-old president of L.J. Altfest & Co. Inc. in New York now has $150 million under management, up from $115 million about a year ago.

Mr. Altfest attributes the increase to his value style of investing. It’s a style that cost him some clients when growth was king, but is now proving to be a winner.

His clients’ portfolios are up an average of 5% this year. The Standard & Poor’s 500 stock index was off 7.7% year-to-date at midweek.

There is no magic, however, associated with that performance. Each of his clients’ portfolios is centered on value-oriented mutual funds – a seemingly simple strategy.

Despite all the competition from other investments such as exchange-traded funds or separate accounts, Mr. Altfest says, mutual funds are still the best.

His emphasis on value, however, may hurt him in the future if the stock market improves.

“The problem is clients,” says Lou Stanasolovich, president of Pittsburgh’s Legend Financial Advisors. “Their perceptions are, `How come you’re out of favor right now?”‘

Q How do you deal with clients who question your value strategy?

A The clients we have know our style. Our style is to buy things that are less popular. Nonetheless, a decent proportion of them continue to ask us questions about our short-term performance.

A lot of them know the answer they’re going to get from us. We’re in it for the long haul. But that doesn’t stop them from asking. We have to take that into consideration. Often, we write about what it is that we’re doing before we do it, and we write about it after we do it.

Q How strong is your value preference?

A We don’t invest in value exclusively, but we have a strong value bias. In most categories, you’re going to find an emphasis on value, but you’ll also find some blend and some growth.

Q When you build a portfolio for a client, how much of it is made up of mutual funds?

A It’s almost all mutual funds. I think that some of the questions that are raised about mutual funds – on tax efficiency, for example – are legitimate. Now we’re moving into separate accounts, but we’re certainly not going to change over.

Q In addition to separate accounts, what alternative investments are you looking at?

A I’m thinking of a fund-of-funds approach to alternative investments, and alternative investments that have liquidity. I think that would be my first thought.

Farther down the road, but still within possibility, is that we’ll be getting involved with a real estate fund that provides liquidity. Real estate is a long-term investment. You just can’t sell real estate like you could General Motors [stocks] and get your money in three days. But there are funds that provide liquidity.

TIAA-CREF has a real estate fund that is very interesting, but it’s limited to people who are non-profits who do business with TIAA-CREF. I’m looking for a supplier of that same approach for regular people.

Q Describe a typical client portfolio.

A Let’s take a balanced account. Most of our accounts are balanced. Suppose we were to say 30% were in bonds. About 15% of that would be in individual municipal bonds. The other 15% would be in taxable bond funds. About 10% would be in the “other” category. That includes real estate investment trusts and the Merger Fund. [The Merger Fund uses a merger arbitrage strategy.] That gives us another 60%. In that would be mutual funds. They would be split into large-cap, mid-cap, small-cap and international.

Q What do you look for in a mutual fund?

A I look for a long-term good record, not a top record. And I look for managers that are not in vogue, because investing in funds that have an outstanding record is death.

Q What are some of the funds you currently like?

A The value funds are performing the best. We have a strong small-cap bias. Small- and mid-cap, that’s working out nicely for us.

(Funds he likes include: Tweedy Browne American Value Fund, Tweedy Browne Global Value Fund, the Longleaf Partners funds, Vanguard Windsor II Fund, Oakmark Select Fund, Strong Small Cap Value Fund and the Royce Opportunity Fund.)

Q What value funds have you stayed away from?

A I stayed away from the Legg Mason Value Trust Fund. I didn’t like the concentration that [manager Bill Miller] had in technology. That’s one of the well-known ones that’s used by advisers. I prefer what you might call down-and-dirty value players. Those are the ones that have worked out best.

Q What funds did you own but eventually drop?

A We dropped the Yacktman Fund a few years ago. We found [manager Donald Yacktman] wasn’t producing relative to his benchmark, and he was suffering from his fund being liquidated. We had some UAM Clipper Focus Fund, but we may have liquidated that to get into Oakmark Select a year ago. It wasn’t so much a negative; we just liked Oakmark Select better. That one was really a home run for us.

Q Given your value bent, how did you handle the run-up in technology stocks?

A With an upset stomach. I did a lot of education. I told people that momentum was like a car with nobody driving it.

Where clients told us, “You better put some money into growth.” I put some money into T. Rowe Price Mid Cap Growth because I knew T. Rowe was underweight in technology. So I did as little as I could.

Q How did your value preference affect performance during the tech run-up?

A Our performance was up, but it was not like some of the others. I told our clients what would happen, and we had to take a lot of calls, and we lost a few people. But people are pleading to come back now. One client said it’s a pleasure being at cocktail parties when everybody is grumbling, and he can say, “My adviser is conservative, and he is up.”

Q Why are investors coming back to you? Is it merely because value is back?

A I’d say it’s because value has come back in style, and word of mouth from our existing clients. [It’s] also a disillusionment from people who said, “What do I need an adviser for? I can pick stocks that can go up.” Now they’re feeling that’s no longer the case. They need some asset allocation.

In the past, they said things were going along just fine. Their investments were up 15% to 20% per year, maybe more. Why did they have to think about their future? Now they’ve got to think about where their money is going to go.

Q What are your performance goals?

A In this environment, I would like my funds to do 10%-plus. Right now they’re performing very well. The last time I looked, we were up about 5%, which puts us on track to meet our 10% goal. Last year we were up about 5% for the year.

Q Do you expect the stock market volatility to continue?

A I think the volatility will continue. I don’t think that Nasdaq and tech stocks will outperform for many years.

SNAP SHOT

Lewis J. Altfest, 60, president of L.J. Altfest & Co. Inc. in New York

Career: 1982, founded L.J. Altfest; 1976-82, director of research and general partner of Lord Abbett & Co. in Jersey City, N.J.; 1975-76, held various positions at Lehman Brothers Inc. in New York; 1969-75, accountant at Wertheim & Co. in New York

Education: Ph.D. in finance from the City University of New York, 1978; master’s in business administration from New York University, 1970; bachelor’s degree from the City College of New York, 1962

Achievements: Associate professor of finance at Pace University’s Lubin Graduate School of Business in New York, co-director of the investment program at the New School for Social Research, served on the boards of directors of the National Association of Personal Financial Advisors and the New York chapter of the International Association for Financial Planning