"Hugely in-vogue stocks rarely do well as an investment"

Most small mutual fund managers count themselves lucky to follow several hundred stocks each month. With a staff of 17, Thomas White Jr., chairman of Thomas White International Ltd. in Chicago, tracks 3,500 companies.

Founded in 1992, White operates three mutual funds — International, American Growth (mostly large-capitalization companies) and American Opportunities (mid-cap) — totaling $75 million in assets. But it also manages $300 million for 120 private clients, including investment guru Sir John Templeton.

Mr. White, who earned an economics degree from Duke University, was in a small executive trainee class at Goldman Sachs in the mid-1960s that included future Treasury Secretary Robert Rubin and future leveraged-buyout master Henry Kravitz. After Goldman, he did tours at Lehman Brothers and Blyth Eastman Dillon before becoming managing director of the Chicago office of Morgan Stanley Asset Management. He left seven years ago to strike out on his own.

Q Other international funds have outperformed yours this year, partly on the strength of investment in Japan, where you have only 11% of your assets. The average is closer to 15%.

A The Japanese stock market has been down since June, but the yen is up about 23% since then [as of mid-November], so the currency translation has benefited other funds more than ours.

We don’t think Japanese companies have really turned the corner yet on earnings, and we fear there may be more false starts in the stock market there before a real recovery takes hold. Many of those stocks are still trading at multiples of 50 and 70 times earnings with returns on equity of 3%.

Q How do you identify value in companies?

AIf you want to buy a summer home in Wisconsin, you can usually get a better price in winter than in summer. That’s linked to weather cycles and human behavior — people want instant gratification when they buy something.

Stocks move in cycles, too. When economic cycles change, companies may move from cheap to expensive, though often, they move too far on both ends of the cycle as a function either of excessive investor exuberance or pessimism. Thus, mispricing is created, which we try to take advantage of.

We don’t try to predict the economy itself, but we do know that cycles will occur, and when they do, there will be rotations in value within every industry.

Q Do you see value in USG Corp., the Chicago maker of drywall?

A USG has been trading at 7? times earnings lately, even though its business has been booming. People fear that when the economy and housing slow, USG will sink fast. But the market has become too sensitive and overcompensated and discounted the stock too far.

In fact, management is much better prepared now for the next down cycle than it was in the past, and this company is almost certain to perform better over the next three years than people think.

Q You’re also a holder of Abbott Laboratories, a stock that has fallen this year.

A The growth has slowed at Abbott as some drugs have come off patent and other promising new drugs aren’t ready for the marketplace yet. There have also been some problems with the Food and Drug Administration. Actually, this is a normal pause in the development cycle — something a value analyst understands. But investors want instant satisfaction, and they aren’t willing to wait, so they’ve sold the stock. In this environment, the shares aren’t correctly priced.

Momentum, both positive and negative, seems to drive many investors, but remember that hugely in-vogue stocks rarely do well as an investment, and hugely out-of-vogue stocks rarely turn out to be poor investments.

Q You like Walgreen Co., which some worry will have a tough time online.

A Walgreen is using the Internet itself, but most people will still want to get their drugs at a store in person. Walgreen has succeeded in taking market share away from independents and has grown impressively internally, while competitors like CVS have grown more by acquisition.

Vitae

Thomas White Jr., 56, chairman, Thomas White International Ltd. in Chicago.

Thomas White American Growth Fund (assets, $20.5 million): year-to-date return, 7.48%; 1-year, 20.70%.

Standard & Poor’s 500 stock index: ytd, 11.96%; 1-yr, 25.58%.

Thomas White International Fund (assets, $40.8 million): ytd, 8.47%; 1-yr, 18.77%; 3-yr, 14.33%; 5-yr, 13.42%.

Morgan Stanley Capital International EAFE Index: ytd, 12.60%; 1-yr, 23.03%; 3-yr, 12.17%; 5-yr, 9.21%.

Foreign stock fund average: ytd, 21.86%; 1-yr, 31.58%; 3-yr, 9.25%; 5-yr, 7.42%.

Data through Oct. 31 with periods over one year annualized.

Source: Morningstar Inc.