Lessons from the meltdown: old ways don’t work

It’s more complex for managers, who’ve got clients to satisfy. Tanking markets could send nervous investors rushing to cash out, just as an abundance of values emerge. Managers have to return clients’ money, which can mean passing up on the good buys and selling into a falling market to meet redemptions.

The turmoil left managers striving to rebound from humbling experiences, and searching for new ways to operate. Here, two fund managers and a bond strategist share their views :

Robert Turner, chairman, Turner Investment Partners: As an expert in technology stocks, Turner had no inkling that one of his favorites, Apple Inc., could tumble so steeply with the rest of the market. But Apple’s stock started 2008 just under $200 a share, and ended it at just $85. This year Apple has been a star, its stock back up to nearly $185.

So what drove the price down so sharply? In part, it was something Turner hadn’t accounted for: A recession rooted in the subprime mortgage crisis triggered events that reverberated to seemingly remote areas like technology. The credit crisis became so pervasive that hedge funds and many institutions were cut off and suddenly looking for cash to meet obligations to investment clients, pension plan participants, and university operations.

Often, that meant selling favored stocks, like Apple, which sent stock prices reeling.

The forced sell-off also extended to normally recession-proof companies like surgical supply manufacturers that could no longer sell to hospitals suddenly unable to secure credit.

At Berwyn, Pa.-based Turner, the painful experience led to a greater emphasis on big-picture economic trends - the kind of forces that can pull down a stock regardless of the company’s fundamentals. Each Thursday, Turner’s investment team leaders gather to consider strategy, with a greater focus on the broader impact of any economic storms that may be brewing.

That’s a new way of thinking compared with March 2007, when Turner Investment published a paper titled “Subprime Mortgages: Way Past their Prime’’ - suggesting early troubles would balloon. But back then, Robert Turner didn’t see a connection to technology.

Now he knows.

Tony Rodriguez, head of fixed-income strategy at First American Funds: It’s hardly news that China is looming larger on the world economic stage. Lately, Rodriguez finds himself considering China’s next moves more frequently as he devises bond strategies heavily influenced by global growth expectations. Not so long ago, he concentrated more heavily on US markets.

“It never used to be that you would look to China as a potentially significant contributor to the pace of recovery from a global recession,’’ Rodriguez says. “Now, people cite them as being the main engine of recovery.’’

Rodriguez is also paying more attention to underwriting - the draining task of looking deep into a company’s finances in search of the credit risks and liquidity troubles. Had investors done more research into Lehman Brothers, its fall might not have happened at all.

Charles de Vaulx, partner, International Value Advisers: A former credit analyst, de Vaulx knows how to uncover risks. He demonstrated that skill after his biggest fund’s launch in October. IVA Worldwide gained nearly 3 percent by the end of the year while broader markets lost more than 20 percent.

De Vaulx was astounded by the market’s seeming inability to recognize problems at companies like Lehman until they were on the verge of collapse. That goes for many investors who seek stocks that are cheap relative to their typically steady earnings. Too many companies’ growing debt loads were ignored, de Vaulx says.

When de Vaulx’s firm interviews candidates to become market analysts, de Vaulx seeks out the ones who emphasize the potential risks from an investment move just as much as the rewards. Typically, however, the majority emphasize the latter, he says. Investors shouldn’t fall into the same trap. “Ask lots of questions about what can go wrong,’’ de Vaulx says.

Mark Jewell writes for the Associated Press.