BUSINESSWEEK ONLINE : AUGUST 7, 2000 ISSUE
BUSINESSWEEK INVESTOR Selected American: A Value Fund That's Beating the Odds In recent years, most mutual funds specializing in beaten-down value stocks have taken beatings themselves. In fact, only eight value-style funds have managed to beat the Standard & Poor's 500-stock index over the past five years. The $4.8 billion Selected American Fund, with a 24.8% average annual return, is one of them. It also is one of the few funds specializing in large-cap value stocks to earn a spot on BUSINESS WEEK's list of top--or A-rated--funds. One reason for the fund's success is that unlike many of its value counterparts, Selected American does not shy away from technology stocks. In fact, about one-fifth of its assets are in tech companies such as Hewlett-Packard (HWP), IBM (IBM), and Intel (INTC). ''We tend to own nonglamorous, workhorse-type companies that we are able to buy at reasonable prices,'' says Christopher Davis, who co-manages the portfolio with Kenneth Charles Feinberg. To screen stocks, the managers start with companies with returns on invested capital of 10% to 15%. To arrive at this figure, they divide earnings by assets (minus cash and current liabilities). Rather than simply accepting earnings as companies report them, the managers make adjustments that they deem important. For instance, while accounting rules do not require companies to deduct the cost of employee stock options, Davis subtracts them. ''Companies pay people options, yet those don't get reflected in the income statement.'' A high return on capital is a start, but it's not enough. Davis and Feinberg also favor companies with low debt and competitive advantages, such as famous brands, patent protection, or powerhouse research and development. Another requirement: a steady growth rate of 8% to 15%. Of course, because the fund practices value-style investing, the price also has to be right. The two calculate what a stock is worth by forecasting a company's future earnings and discounting them to arrive at a present value. The flip side is a strict sell discipline. Although Davis and Feinberg are loyal--portfolio turnover is a low 21%--they dump stocks when they think they're overvalued. That happened early this year when semiconductor-gear maker Applied Materials hit $110 a share, up from about $10 in 1998. ''If we can't make the math work, we can't own the stock,'' says Davis. Davis, Feinberg, and their associates also run the Davis Funds, which are load funds sold by brokers and financial planners with sales charges as high as 4.75%. Selected American lets you tap the Davis talent without paying a load. Any value investor can see that's a good deal. By Anne Tergesen _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Funds That Haven't Lost Their Zip TABLE: New A-Rated Equity Funds TABLE: New A-Rated Bond Funds Meridian Value: Looking for a Few Battered Stocks TABLE: Meridian Value Selected American: A Value Fund That's Beating the Odds TABLE: Selected American INTERACT E-Mail to Business Week Online

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