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Five money managers examine portfolio management strategies in the latest issue of The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info545.htm

TWST: This has been a good time for value; it has outpaced growth during the past two years. Do you expect that to continue and, if so, for how long?

Mr. Magnuson: There are several reasons why it should continue. The turn to value came in March 2000, and we believe it will continue for several reasons. First of all, there is still a large disequilibrium between growth and value. What I mean by that is that the p/e ratio on the Russell 1000 Growth Index is approximately 31, and the p/e ratio on the Russell 1000 Value is 19. The spread is unusually large. Historically, the spread between the Russell 1000 Growth and the Russell 1000 Value is around 8 multiples. So the spread is still very wide historically, looking back over 20 years. Now, the second reason is that the technology bubble that occurred from about June 1997 to March 2000 resulted in a real misallocation of capital, and there were companies in the tech sector that were able to raise capital that cost nothing. There were a lot of sectors and companies that were starved of capital. Gradually and steadily, capital has been flowing in other directions. The third reason that this value stock trend should continue has to do with dividends. Historically, dividends are a large part of overall return. Going forward as the population grows older, they will look to ways of supplementing their working income with retirement income. They should look to dividend-paying companies. In the current market environment the proportion of companies paying dividends is perhaps the lowest ever. This makes dividends a scarce commodity, and it may be one of the main reasons why companies that pay dividends have been outperforming. But there is something more at work here too. Dividend-paying companies are usually higher quality companies than those that do not pay dividends. This is because managements are forced to accept a discipline that respects the capital. Contrast this to the total disregard for capital during the tech bubble from the managements of companies that never paid a dividend. Let me elaborate a bit. From June 1997 to March 2000 there was a run-up in tech stocks of nearly 6 trillion in market capitalization. From that time until the end of September 2000, 6 trillion in market capitalization got wiped out. What do you think the chances are that these types of companies that just wasted the capital are going to get a second chance? It is just not going to happen on any large scale. It’s going to be hard to get, and slow in coming. That time is past. There are still factors at play to support a value strategy. One of those has to do with the accounting issues. Enron has brought the accounting issue front and center, and a number of companies, Global Crossing, Computer Associates, and so forth, have done the same. With goodwill accounting, there’s going to be 1 trillion of write-offs in the first quarter. Option accounting is up next. Then this whole issue of taking reported earnings and putting that in the background and stating pro forma earnings in the foreground is just getting out of hand, especially on the tech side. I expect the SEC could come along and just knock this pro forma stuff out. And if that’s the case, it’s going to be an example of the emperor wearing no clothes for a number of companies, especially on the tech side. So the quality of earnings had become the real question. These kinds of changes are good for the accounting and reporting long term, but short term it’s not going to be good for a lot for those companies that use this type of aggressive accounting just to make things look better. In general, the value names are not as susceptible to these kinds of problems.

TWST: What are some of the stocks that you think haven’t turned around that you’ve invested in?

Mr. Magnuson: We invested in a company called Fresh Del Monte (NYSE:FDP), which is in the food industry. They derive a lot of their profits from fresh product; I’d say the largest product would probably be bananas. But two or three years ago there were a lot of restrictions on trade to Europe and these barriers have been lifted, so it’s not an issue like it once was. It’s an example of something that’s temporary that eventually goes away, but nobody wants them at the time.

This special Investing Strategies Report includes:

1) Alexander L. Muromcew, International Equity Portfolio Manager and a Vice President at Loomis, Sayles & Company, L.P., examines portfolio management strategies in this timely and deeply informative 3,900-word interview from The Wall Street Transcript.

2) Robert L. Lee, Senior Vice President of Sentinel Advisors Company, examines portfolio management strategies in this timely and deeply informative 4,400-word interview from The Wall Street Transcript.

3) Martha Kimball Pomerantz, Investment Principal at Lowry Hill, examines portfolio management strategies in this timely and deeply informative 3,900-word interview from The Wall Street Transcript.

4) Lawrence Auriana, Portfolio co-Manager of Federated Kaufmann Fund, examines portfolio management strategies in this timely and deeply informative 3,700-word interview from The Wall Street Transcript.

5) Paul A. Magnuson, Principal, Senior Research Analyst and Portfolio Manager with NFJ Investment Group, examines portfolio management strategies in this timely and deeply informative 3,500-word interview from The Wall Street Transcript.