One on One: "We are now in a world where professional skill will be of extreme value to the public"

It’s difficult to imagine what investors will miss most about Ralph Wanger when he retires in a few weeks: his stock picking or his irreverent sense of humor.

Mr. Wanger is legendary for his well-thought-out approach to small-cap investing. For more than 30 years, he has overseen the popular Acorn group of funds, including the $8.1 billion Acorn Fund, which produced an average annual return of 13.05% over the 10-year period through July 31.

“Ralph Wanger’s feet-on-the-ground and valuation-sensitive approach is really somewhat unique in the world of small-cap-growth funds,” says Emily Hall, an analyst with Morningstar Inc. in Chicago. “He is someone that isn’t swayed by the latest hot trend. His emphasis really is on buying good businesses.”

Mr. Wanger can always be counted on for a good guffaw – even if it is at his own expense.

Consider, for example, an article he included in a November 2002 shareholder report for the Acorn Fund. In that write-up, “The Vanity of the Bonfire,” Mr. Wagner made light of a $956 million drop in assets that occurred as a result of the market downturn during the first nine months of the year.

While most managers offered drawn-out explanations for their losses, Mr. Wanger invited shareholders to imagine how much work it would have been to destroy all that money on purpose.

“One way to do it would have been to convert $956 million into $100 bills on Jan. 1, 2002, and order our 20 investment professionals to spend all their time burning it,” he wrote. “It sounds sort of festive, really – drink some beer, make s’mores and enjoy the glow, warmth and fellowship around the bonfire (singing of `Kumbayah’ optional).”

On Sept. 30, he and his wife, Leah Zell, who leads the international investment group at Liberty Wanger Asset Management LP, will assume part-time positions at the Chicago-based company. Charles McQuaid, co-manager of the Acorn Fund since 1995, will become chief investment officer.

Q Why are you stepping down?

A I am 69 years old, and Sept. 30 – the day I am stepping down – will mark 43 years in the industry. If I haven’t learned it by now, I probably am not going to. It’s time to go and do something else.

Q What else will you do?

A I will still be working part-time. I will be helping out with general strategic guidance or transmitting the culture to the new kids.

I will do some marketing, and I will continue to write some of the shareholder essays and quarterly reports. That is something that has been a pleasure for me, and only a mild irritation to shareholders, so I will probably keep doing it.

Q What is the biggest change you have seen in the evolution of the mutual fund industry?

A There’s just been a lot of scale. The mutual fund has really become the investment vehicle of choice for the average American. That was not by any means the case 30 years ago.

Obviously, it means the mutual fund industry has an enormous responsibility to act responsibly to safeguard the savings of Americans.

Q Do you think the industry is living up to that responsibility?

A In many respects, it is. There have been multitudinous scandals throughout the financial services industry. The mutual fund industry has been remarkably free from any scandals involving thefts from customer accounts. I think that reflects a shocking lack of initiative on the part of portfolio managers.

Q Where do you think the industry may have fallen short in meeting that responsibility?

A One of the challenges we have is to deliver funds to our customers with a strong customer-value proposition. For a few years, when people thought they could make 20% a year owning a fund, paying a large front-end load didn’t seem to be a hang-up. In the lower-return environment we are likely to be in, it would be very nice if we could deliver a product to the end consumer with a lower distribution cost.

Q So you think the scrutiny that that area is receiving from regulators is well deserved?

A Both distribution costs and expense ratios deserve scrutiny. These costs are important.

It would be very useful to have the business be profitable to the fund management companies and still have it a good economic value for the fund shareholder.

Q Are you worried that investors will yank assets from the firm when you leave?

A I think our customers understand that we have a team-managed fund group. Chuck McQuaid is a highly experienced and brilliant investor.

We announced to our shareholders that I was stepping down in May, and in May, June and July, we had the best net sales for the Acorn Fund that we’ve ever had. Apparently, our shareholders are quite pleased that I am leaving.

Q What advice have you given Mr. McQuaid?

A I’ve told him to balance discipline and creativity.

Q How have you been able to do that all these years?

A I’ve done it by not being very disciplined. Chuck has been much better at the discipline part, and I’ve been better at the creativity part, in general.

The secret of running a fund business is no different of running any other business: It’s a question of getting very good people around and then keeping them incentivized and trained. It sounds easy, but it’s more complex than it sounds.

Q What is your outlook for the market?

A In the very strong and speculative market that we had in the late 1990s, professionalism added very little value. We are now in a world where professional skill will be of extreme value to the public.

Q What has surprised you about the current rally?

A It’s amazing that people are still enthused about investing. Many people lost an immense amount of money in the period between 2000 and 2002.

After a period like that, you would assume people would find the stock market repugnant for a period of years.

Q Is that stupidity or tenacity on the part of investors?

A It’s hard to say. Those words are often synonymous.

Q Do you think the current rally has legs?

A If my theory is correct, this rally will go on for a little while. Then it will stop, before going down and up, down and up – never really reaching new highs.

I’ve been pleasantly surprised by how much people have stayed with the market, but investors are in a real dilemma right now.

Q What do you mean?

A There is what I will call a “yield panic.” Two years ago, you could make 6% in a money market fund and 7% to 8% in corporate bonds of decent quality. People could set up their investment plans so you could be fairly conservative and still have a good income.

Today, you have such low returns on short-term fixed income that people have really gotten panicked. They have been forced to take more risks in order to get the yield they require. This is hazardous.

SNAPSHOT

Ralph Wanger, 69, lead portfolio manager, chief investment officer and president of Chicago-based Liberty Wanger Asset Management LP, now part of Columbia Management Group Inc., a FleetBoston Financial Corp. company.

Assets under management: $9.2 billion

Career: 1970-present, portfolio manager of Liberty Acorn Fund

Education: bachelor’s (1955) and master’s (1958) degrees in industrial management from the Massachusetts Institute of Technology

Liberty Acorn Fund (assets, $5.39 billion): year-to-date return, 28.77%; one-year, 29.53%; three-year, 7.43%; five-year, 15.30%

Average small-cap-growth fund: ytd, 30.66%; 1-yr, 26.74%; 3-yr, -10.57%; 5-yr, 8.50%

Returns as of Aug. 29; periods over one year annualized

Source: Morningstar Inc.