MARTIN T. SOSNOFF: “FOR ME, AIG IS THE COCA-COLA OF THE INSURANCE INDUSTRY”

Martin T. Sosnoff is possibly the scrappiest money manager around.

After more than four decades in the business and a very difficult past few years, punctuated by the loss of his company’s second-largest account in May, the veteran investor is plunging into new territory.

In July, New York-based Atalanta/Sosnoff Capital Corp., a publicly traded company catering mostly to institutions, entered the crowded retail arena with its first mutual fund. The no-load fund is sold directly and through supermarkets.

Mr. Sosnoff also has restructured management of the 17-year-old company, scaling back the president’s role to overseeing investments and tapping Craig B. Steinberg, who joined in 1985, to fill that position last year. What’s more, he is shopping for an acquisition to increase its business of managing money for wealthy clients.

While Mr. Sosnoff rose to prominence in the late 1980s as a market prognosticator and continues to pen a column on investing for Forbes, his own company was hammered in 1996 and 1997 by its technology bets – although he says performance has improved this year.

Mr. Sosnoff takes a disciplined approach to his value-oriented growth strategy, which may have contributed to his performance troubles in recent years, when so much cash was chasing the leading large cap stocks. Both soft spoken and blunt, the native of New York City’s borough of the Bronx has named Mr. Steinberg as his successor, but says he has no plans to retire.

Q: Why get into the retail market at this very difficult time?

A: Most growth funds have underperformed the market. If we can outperform the Standard & Poor’s 500 index, we can build a profit center eventually. We decided to put (corporate money) in the fund, about $9 million. We have no illusions that this fund will take off. But if we can build a record for a few years, then we can take it to the next level.

Q: Did you see this market correction coming?

A: Let’s put it this way: The fund didn’t get fully invested from day one. We’re probably around 80% invested now.

Q: What is your stock-picking strategy?

A: We are growth-oriented investors, not that we wouldn’t buy some great value stocks too.

We overweight sectors we like and avoid or underweight sectors we don’t think are too attractive. We deal mainly in large-capitalization stocks, although we do buy some mid-cap stocks.

This fund will have a very concentrated position. It’s probably never going to own more than 30 to 40 stocks.

Today, the overweights are in health care and technology to some extent. Largely names like Microsoft Corp., Sun Microsystems and International Business Machines.

We also own media stocks News Corp., Time Warner and Cablevision Systems. We have one Internet stock, America Online.

In the financial sector, we’ve avoided the banks, but we do own some insurance stocks – American International Group, General Re Corp. and Allstate Financial Corp. We also own some brokerage stocks, including Travelers Group.

Q: How do you compensate for the risks involved in a concentrated portfolio of 30 to 40 stocks?

A: There is no way of compensating for the risk. You have to be right, basically. So if you overweighted a sector and the sector does poorly, you made a mistake which you have to undo at some point.

Q: What are some of your favorites?

A Allstate. The analysts who follow this sector are very cautious about price and market share competition.

But that’s not the whole story because Allstate is really a major factor, particularly in automobile and homeowners, and is holding market share. It has a 95% renewal rate on its policies. It is very profitable and a prime beneficiary of disinflation. They don’t have any foreign business, and the stock sells at 12 times earnings. The stock has come down from $50 to the 30s.

All its $2.5 billion earnings are free cash flow because of its underleveraged position.

Pfizer Inc. is under a cloud. The analysts can’t quite figure out Viagra. The drug is going to be a worldwide drug. But that’s not the reason we own Pfizer.

If you look at the financials of Pfizer, you see something quite different than the norm for the drug industry. In the last several years, there has been enormous plowback into the business in terms of a high ratio of research and development relative to revenues and much higher ratio of selling, general and administrative expenses. So Pfizer is reinventing itself with tremendous muscle in research and development and marketing.

Q: What do you think of AIG’s recent acquisition of Sun-America Inc.?

A: I think they paid a very full price. But I don’t discount (Maurice “Hank”) Greenberg. I’ve watched Greenberg for 35 years build a great company. For me, AIG is the Coca-Cola of the insurance industry. It’s a worldwide operation with very strong roots in Japan and China. Obviously, Greenberg thinks he can leverage Eli Broad’s business in terms of selling annuities, particularly in the Far East. I wish him luck, but the stock reacted mildly negatively to the price he paid. The next five years will tell who’s right.

Q: Tell me about your sell strategy.

A: When the fundamentals of a company or industry change and when basic economics change, then stock could be sold very fast. For example, we sold all our banks on the basis that problems in emerging markets and in the transaction sectors of derivatives, foreign exchange and bond trading worldwide were so difficult to analyze that there were just too many time bombs out there. We sold our last bank stock, BankAmerica Corp., just a few days ago.

Q: Do you do any short selling?

A: There has been fairly active shorting (in our hedge funds). We’ve covered a lot of shorts recently. The biggest short I had out was Nike, which we shorted around $50 and covered at $35 on the basis that Nike was a company that had to reinvent itself. It had very low earnings projected relative to Wall Street analysts, who were too optimistic.

Q: What do you think about current valuations?

A: What’s interesting is that dividend discount models are now showing the market to be somewhat undervalued. We’re not so sure because most dividend discount models are using fairly aggressive forecasts of earnings long term.

Our forecast for the earning power of the S&P 500 index is no more than 4%. Many dividend discount models are still using 6% to 7%. We think the S&P 500 in 1999 will earn about $46 per share, which is probably what it’s going to earn this year. In that forecast, the market is not so undervalued. In fact, you might say it’s fully valued.

Q: During the past two years, you have lost some key clients due to poor performance. Why did performance slip?

A: We did have a lot of problems, particularly in 1996 and 1997. There have been a lot of staff changes here. I think we got caught in some of the technology stocks quite badly. That was a large part of the shortfall. This year we are doing quite well with technology picks.

Q: Can you tell me about the staffing changes?

A: We separated the powers of running the business from the presidency, which I think was a good decision. The president now concentrates strictly as a senior member of the investment committee.

Q: Are you still shopping for acquisitions in order to expand the company’s business of managing money for wealthy individuals?

A: We are in the process of considering a small acquisition. Our point of view on acquisitions is that they must have a hurdle rate of 20% return on equity and the fit has to be good in terms of chemistry.

VITAE

Martin T. Sosnoff, 67, founder, chief executive, Atalanta/Sosnoff Capital Corp.

Other credentials: Forbes columnist; author of two books, “Humble on Wall Street” (1975) and “Silent Investor, Silent Loser” (1986).

Assets under management: $2.1 billion

Equity composite performance: Year-to-date, 8.3%; 1-year, 10%; 3-year, 18.3%; 5-year, 15.6%; 10-year, 17.5%.

Atalanta/Sosnoff Fund (assets, $8.6 million): Total return, June 18 – Sept. 17, -4.18%.

S&P 500 index: Year-to-date, 6.12%; 1-year, 30.15%; 3-year, 30.24%; 5-year, 23.08%; 10-year, 18.56%.

Returns through Sept. 22

Sources: Atalanta/Sosnoff, Lipper Analytical Services Inc.