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BEHIND THE NEWS: Plunge takes bloom off investing stars-at least for now

October 27, 2008

You think the recent stock-market gyrations have been g u t - w r e n c h i n g ? Imagine if you're responsible not just for your own money, but for millions of dollars others have entrusted to you.

That's the reality for Indiana's professional money managers, who collectively oversee billions of dollars. In good times, top-performing managers of mutual funds and individual accounts are treated like heroes, heralded with features in Barron's or appearances on CNBC.

Just two months ago, for instance, Barron's named Tom Pence, who runs growth mutual funds out of Indianapolis for San Francisco-based Wells Fargo and Co., a top 100 fund manager. Investor's Business Daily wrote two flattering articles about Pence and his team over the summer.

Times like these are a different matter. As stocks slid into a free fall earlier this month, Hoosier investment managers had the same sick feeling as the rest of us.

"I don't think anyone is really immune to the emotions of the day," said Mark Foster, 50, chief investment officer of Columbusbased Kirr Marbach & Co., which manages more than $350 million. "When things are cratering, it's easy to get caught up in that. Anyone telling you they are not concerned, or hasn't had any panic moments, is being less than honest."

Added Robert Auer, senior portfolio manager of the Auer Growth Fund, a $124 million mutual fund based in Indianapolis: "We get a little tinge, but we aren't very tempted at all to change the plan. If you changed it, it would be a bet against America. It would be a bet that this is the one that is going to take us down. We are not going to bet against the United States."

Indeed, a crisis is no time for a money manager to lose his head and abandon strategies that have worked for decades.

For Kirr Marbach, that means staying true to its philosophy of value investing-focusing on stocks that appear to be trading at a steep discount to the overall market.

So far, the firm has little to show for its discipline. Its Kirr Marbach Partners Value Fund has declined 39 percent this year.

But as Kirr Marbach leaders wrote in a note to clients Oct. 9, "This too shall pass.

"There is no question we have experienced a multi-vehicle pileup of epic proportions, but the economy and markets have endured many crises," the note said.

"While each seemed spectacularly unique at the time, the common recipe for disaster has usually included a new investment theme combined with massive leverage, insufficient regulatory oversight and a dose of greed and hubris. ... We've been through this before and survived to rebound and flourish."

Auer is similarly philosophical-even as the fund he runs with his father, Bryan, sits 46 percent in the red for the year.

"We have had many quarters where we just get clocked, but we stick with the plan," said Robert, 47.

The Auers' fund is new-it launched in December-but the approach isn't. Bryan, 73, former owner of a chemical business, began applying it to his own investments in 1987, assisted by Robert, a longtime financial adviser at Morgan Stanley.

The Auers use a screening process to help pick stocks. To be considered, a company has to have increased sales at least 20 percent and earnings per share at least 25 percent, compared with a year earlier. It also has to have a clean balance sheet and be trading at a price-to-earnings multiple below 12-cheap by historical standards.

Over the 20 years leading up to the fund's launch, the strategy yielded a whopping annualized return of 30.2 percent, according to figures in the fund's prospectus, which were verified by an independent accounting firm.

Yet it wasn't a straight line up. Six times in that 20 years, the strategy yielded a quarterly decline of more than 15 percent. But often, performance quickly roared back.

Which explain why Auer is so excited now. As markets have tumbled, potential buying opportunities have ballooned. "I have never seen so many stocks at such good prices where there was no fundamental deterioration" in the business, Auer said.

Customers stay put

Hoosier investment managers say few clients have yanked their money in recent weeks, frustrated over big losses.

That's partly because the sell-off has been so sweeping. Regardless of what strategies managers employed, they got trounced.

It actually was harder to keep clients in the late 1990s, before the Internet bubble burst, Foster said. His firm's value focus kept it out of Internet, technology and telecom stocks-which were zooming higher at the time, but soon crashed.

In contrast, "this decline has been nondiscriminatory," Foster said. "There is no place to hide."
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