Managing the meltdown

(JUSTIN IDE/HARVARD NEWS/FILE 2007)

Anxious investors are trying to assess the damage after the shakeup in the nation's financial system last week led by the collapse of Lehman Brothers Holdings Inc. and the takeover of Merrill Lynch & Co., both New York investment firms. Five money managers spoke with Globe reporters Steven Syre and Ross Kerber about how savvy investors can survive the market turmoil.

MOHAMED EL -ERIAN
Cochief executive, Pacific Investment Management Co.

MOHAMED EL-ERIAN DIDN'T TALK SO MUCH ABOUT home-run investment opportunities when he was the president of Harvard Management Co. Playing defense to avoid investment risks was a big part of the job overseeing Harvard's giant $36 billion endowment.

El-Erian sounds much the same in his new job as cochief executive of Pacific Investment Management Co., a California company that manages $830 billion in mostly fixed-income funds.

El-Erian has sophisticated tools at his disposal to try to forecast investment risks and protect against them. But he says individual investors can do a lot to protect their own portfolios by simply having cash on hand at all times so they are never pushed into selling securities at the darkest and most expensive moments.

"It comes down to having enough liquidity," he says. "The one thing you don't want to be is a forced seller. Then you're really in trouble."

El-Erian looks at the turbulent market and tries to find opportunities created by temporary money movements rather than real risk. One example: Ginnie Mae funds that own government-guaranteed mortgages but pay 2 percent more than actual US Treasury securities.

"You can look at the highest quality parts of the market and find these dislocations," he said. "That's where value is. You don't want to go into more risky stuff because it's really uncertain out there. So many unthinkables have become thinkable."

SCOTT BLACK
President, Delphi Management Inc.

SCOTT BLACK CAN RECITE A STREAM OF FINANCIAL statistics about dozens of companies, the kind of information that is the lifeblood of value investors.

Black, the president of Delphi Management Inc. in Boston, believes those kinds of numbers reveal plenty of stock market opportunities.

But there's a reason he was waking up in the middle of the night on several occasions last week to check on financial news around the world.

"I've been through a lot of recessions and most of them were part of traditional business cycles," he says.

"This one is the underpinning of the banking system, and it's serious. This is the most critical period for the stock market in my lifetime."

Black remains wary about the health of the overall stock market but applied his standard kinds of value-oriented measures to individual stocks as usual last week.

He found lots of attractive companies with cheap shares and rock-solid balance sheets with the ability to generate lots of cash from their businesses.

They range from technology companies like Oracle Corp. to energy businesses like oil driller Ensco International Inc.

But Black thinks most individuals should remain conservative with their money. "It took four or five years to create this mess," he says. "It's not going to disappear overnight," he says.

MARGIE PATEL
Manager, Evergreen mutual funds

MARGIE PATEL TOOK HER LUMPS WITH MOST OTHER mutual fund managers last week. It didn't hurt her confidence.

"When whole groups of stocks move down 10 or 15 percent in a day, you can't take it personally," says Patel, who manages two Evergreen mutual funds that own both stocks and bonds. "In this market, we're all rookies. Nobody has seen one like this."

Patel doesn't get shaken easily. Among other things, she remembers how it felt to go to work after grim events like those of Sept. 11, 2001. "Not only were markets weak, it looked like it would be the end of life as we knew it in the United States," she says. "Think back how terrible that was but we regrouped."

Her strategy for selecting stocks and bonds didn't change a bit last week. Patel focused on big-picture themes that had been driving her investment decisions before markets soured.

She concentrated on stocks of firms that sell diagnostic tools into growing medical markets, bonds of utilities that must spend money to improve infrastructure, and shares of US industrial firms making products to help build out developing nations.

Patel is no stranger to risk after years investing in high-yield bond markets, but sees most of it confined to staggered financial service companies, housing, and autos. "Step away from that and the world economy looks OK," she says. "What you have is a chance to buy securities very cheaply."

JOHN CAREY Portfolio manager, Pioneer Investments

In one of the most unsettled trading weeks in history, John A. Carey said he tried not to get too distracted.

As portfolio manager of Pioneer Investments' $6.6 billion flagship Pioneer Fund, Carey owns several stocks in the midst of the financial sector maelstrom including Bank of America and Franklin Resources. Both took wild rides this week first on concerns about a slowing of global credit availability and then as details emerged about the shape that various government rescue plans could take.

But Carey said he bought the stocks based on their long-term prospects, and held on to them through the tumult. "My own view at a time like this is to look out in the longer term and focus on fundamentals rather than focus on rumors or what a bailout might look like," Carey said.

For one thing, there's bound to be debate over the exact terms of all the government emergency actions, he said, which will have a big impact on the prices of companies whose prospects are tied to public policies.

At the same time, a worldwide slowdown and the stabilization of the US dollar against foreign currencies are likely to be good for domestic stocks and markets, he said. "The US is looking like a safe haven again for a lot of foreign money," he said. Though he didn't name names, he said he's optimistic for companies with a big US market share in consumer products, healthcare, and utility markets. The bottom line is how well a company can stand on its own, whatever the shape of the final US rescue plans. "You want companies that are self-sufficient and self-financed, and not companies that are going to depend on government subsidies and easy credit," he said.

PETER LYNCH Famous stock picker

As markets plunged in 2002, Fidelity Investments' famed stock picker Peter Lynch appeared with then-Commerce Secretary Donald Evans in Boston and told the audience of small investors to bet on a long-term recovery. "I wouldn't bet against America, we'll get out of this one," Lynch said at the time.

In interview on Friday afternoon Lynch made essentially the same point. Even if in hindsight this turns out to be the 11th recession in the United States since World War II, Lynch said, strong companies will still earn their edge and pay off as long-term investments.

Lynch compared the current period to the retrenchment of 1990 and 1991, when many banks collapsed and lending froze up. "The surprising part is that unemployment hasn't jumped" higher now as in previous downturns.

But only an investor willing to become very knowledgeable about companies and their industries should bother investing in individual stocks, he said. "The term 'play the market' has done so much damage," Lynch said. Aside from investments in vehicles like mutual funds, "the average person should know seven or eight companies really well, and own two or three of them. They should be able to give lectures about them."

Lynch's advice is similar to tips he's given in the past as the former manager of Fidelity's flagship Magellan mutual fund. Perhaps ironically given his celebrity, Lynch suggested that some well-known executives get too much attention from investors compared with a company's fundamentals.

He used the example of Bethlehem Steel in the 1980s, facing tough competition and heavy legacy costs. "I'll tell you, if Jack Welch, Warren Buffett, and Bill Gates tried to turn around Bethlehem Steel 20 years ago, you would have never heard of those guys," he said.

Steven Syre can be reached at syre@globe.com. Ross Kerber can be reached at kerber@globe.com.