Q&A JOHN WILSON: "WE LOOK FOR THE GORILLAS"

John T. Wilson is a natural-born investor.

“This is going to sound scary,” says the manager of State Street Research and Management Co.’s $2.4 billion Investment Trust fund, “but I’ve wanted to be in this business ever since sophomore year in high school.”

Mr. Wilson, now 35, made his Wall Street debut two years later when he used $1,000 he received as a high school graduation gift to buy shares of IBM. He held on to the stock for a couple of years and sold it at a 40% profit, he recalls.

“I sold it because I was concerned that the PC business was going to hurt their business,” he says. He was eventually proven right — five years later when IBM stock halved in value.

Lately his market calls have been even better. His large-cap State Street Investment Trust, a growth fund, is outpacing its peers by more than five percentage points this year and the fund has a four-star (out of a possible five) risk-adjusted rating from Morningstar Inc., the Chicago-based fund tracker.

Mr. Wilson came to Boston-based State Street Research in 1996 after a stint as a portfolio manager at Phoenix Investment Partners, which is based in Hartford, Conn.

It’s a pretty weighty post. He is only the fifth manager of the 75-year-old fund, State Street’s largest.

Including the Investment Trust, Mr. Wilson manages nearly $7 billion. Among his other charges: the $240-million Equity Investment fund and the Met Series Growth Portfolios the firm subadvises for parent company Metropolitan Life Insurance Co.

Mr. Wilson also is a member of State Street’s eight-member large capitalization growth team, which manages nearly $15 billion in assets for retail and institutional investors.

Given his background, it’s no surprise that Mr. Wilson likes large, well-established companies in a broad range of industries. Among his favorites are banking, utilities and retail.

“We spend a lot of time looking for companies that can really control their competitive space,” he says.

Q Describe your stock-picking strategy.

A We use a blend of top-down and bottom-up philosophies. From a top-down perspective, we spend a fair amount of time looking at things like sector allocation, industry weightings and overall corporate earnings.

From a bottom-up perspective, we do the traditional sort of stock picking — mucking around in the weeds looking for undervalued securities. We look for the gorillas, the number one or the number two companies in their industries. Those are the companies that can really control their own destinies. The exciting part of all of this, of course, is finding the undiscovered gorilla.

Q Given the abundance of research on large caps, do you get out of the office and meet face to face with the management of these companies?

A Yes. That’s the fun part. We have them come in here a fair amount of the time. I probably meet with a couple managements a day and do actual site visits about once a week. It’s good to see people on their home turf. You get a real sense of morale, enthusiasm and commitment. You can also tell when they are lying to you.

Q How do you decide when to sell a stock?

A That’s an increasingly tough question. We work closely with the analysts and the analysts all have price targets. It’s not like the price targets are set in stone. Usually, when we get within 10%, we revisit those price targets. That can lead to a sell, a happy sell.

Q What about an unhappy sell?

A We certainly have situations where there’s a material change in fundamentals or an earnings shortfall occurs. When that happens, we basically go back to the underlying premise that led us to own that stock. If there’s been a material change in that premise, the odds are better than not that we will sell the stock.

Q Can you give me a recent example?

A Back in February we sold Circuit City Stores. We had expected several things. First, that PC pricing would stabilize and improve. We expected the digital video disc player would be an important catalyst and drive enthusiasm. We also thought the valuation was attractive.

Lo and behold, we were ‘0 for 2’ on those premises. Computer prices have continued to come down and the DVD hasn’t really materialized.

Q How has concern over Asia affected the fund?

A It caused us to accelerate a pruning of technology companies. It also caused us to increase the amount of cash in reserves. We got more domestic. The Asian situation is going to be with us for a while. On balance, Asia has forced us to be more defensive than we would be otherwise.

Q How concerned are you about the troubled Japanese market?

A Japan has become a new focal point and obviously far more significant to most U.S. companies. I mean, we can get all worked up about Indonesia and Thailand, but frankly they are not big. If you play out a very negative scenario in Japan, that has more dramatic implications for U.S. corporate profits.

Q What’s your outlook for the U.S. market for the year ahead?

A We’re reasonably cautious right now. The market is up a lot more than we would have thought, year-to-date. Bond yields have obviously been very supportive. I’d personally be pretty pleased if we got out of the year where we are today.

Q Do you think valuations are way out of line?

A You can’t help but get a little squirrely about the huge spread between large-cap and small-cap stocks.

We can dip down into some of the mid-caps, but our style and the product has a large-cap focus. We’re not going to play in the small space, but I am concerned about the divergence between big and small.

Q What’s your take on foreign stocks?

A We’ve got a little less than 10% of the portfolio overseas. Two of our best stocks this year have been foreign stocks.

Q Which two?

A Renault, the French auto company, and Philips Electronics NV, the worldwide giant based in the Netherlands.

Q Are you planning to increase the fund’s overseas exposure?

A I think we’re heading that way. We’re going to stick to our U.S. roots, but I think international opportunities will look more interesting to us. We’re not going to turn the fund into an international fund, but I can see that 10% figure being moved up into the mid-teens.

Q How concerned are you about the Year 2000 issue?

A I don’t want to overplay it, but at the same time I don’t want to sell it short as an issue for technology stocks. The proof of the pudding is probably going to come in the third or fourth quarter of this year. That’s when big companies start looking at their technology budgets for next year. There’s a concern that there may be some budget allocation away from new projects like PC upgrades and into solving Y2K problems.

Q What companies are you most excited about right now?

A One is a company called Qwest Communications International. They have a process of constructing a very low-cost, nationwide, fiber-based optical network. What happened to the computer industry 10 or 15 years ago is starting to happen to the telecommunications industry, where pricing is going to come down dramatically because low-cost fiber is working its way into the system. We think Quest, with some strong management leadership and a good, low-cost asset base may be a gorilla in the new world order.

Q Any others?

A We’ve been adding to utilities for the last year. It’s harder to come up with a gorilla in the utilities space. Texas Utilities Co. and Unicom Corp. are two names that come to mind. We think both have a 20% to 25% total return potential. Another name in that space is Enron (Corp.), which fits the gorilla paradigm a little bit better.

Q What’s your position in electric utilities right now?

A We owned barely any electric utilities a year ago. Today, including Enron, we are (at) about 4.5%.

Q Why are you so bullish on this sub-sector?

A What initially interested us in the electrics is that they had one of the worst periods of relative underperformance over the last year and a half or so. As of last July, we started to get into a phase where the whole deregulation of the electricity industry started to become a little more clear. People initially thought this was going to be a complete train wreck.

Vite

John T. Wilson, 35, portfolio manager, State Street Research Investment Trust, Boston

State Street Research Investment Trust (assets, $2.4 billion): year-to-date, 23.50%; 1-year, 27.62%; 3-year, 28.52%; 5-year, 21.33%

Large-Cap Peer Group: year-to-date, 17.93%; 1-year, 24.74%; 3-year, 25.77%; 5-year, 20.74%

Standard & Poor’s 500 Stock index: year-to-date, 20.93%; 1-year, 29.46%; 3-year, 30.40%; 5-year, 23.84%

Largest holdings: General Electric, Banc One, Tyco International, US West, Warner Lambert Co.

Figures are as of July 10 and include average annual returns for periods over one year.

Source: Morningstar and Lipper Analytical Services Inc.