One on One: "I think the economy is generally in good shape"

Unlike many top executives who are handed the reins of a company after years of service, Charles “Chuck” McQuaid isn’t hellbent on making change for change’s sake.

Perhaps that’s because Mr. McQuaid, 50, has long played a decision-making role at Columbia Wanger Asset Management LP in Chicago, one of the most respected small-cap investment shops in the country. As the more serious sidekick to the irreverent Ralph Wanger for two decades, he was the logical choice for a successor when Mr. Wanger went into semiretirement, say industry observers.

Mr. Wanger officially stepped down from running day-to-day operations at Columbia Wanger at the end of September. His wife, Leah Zell, who led the firm’s international group, also stepped down at that time. However, the duo maintains a presence at the firm.

No one is expecting any big surprises from Mr. McQuaid as Columbia Wanger’s lead portfolio manager, chief investment officer and president.

“Given the fact that this is a homegrown group of people, I don’t expect to see a lot of big changes at the firm,” says Emily Hall, an analyst with Morningstar Inc. in Chicago.

Even Mr. McQuaid, who is lead manager of the popular $10.7 billion Acorn Fund, downplays the significance of his ascension. He says he will pick up where Mr. Wanger left off. Still, Mr. McQuaid concedes, his style of management is very different from Mr. Wanger’s.

“Ralph is more on the creative side,” he says. “I am more on the discipline side. When you are on the discipline side, it basically means you force decisions.”

Q Has filling Mr. Wanger’s shoes been a daunting task?

A My biggest challenge, and one I can never meet, is to tell jokes as well as he does.

Q Your firm went through a big ownership change a few years ago when it became part of Columbia Management Group, a FleetBoston Financial company. How has that affected things?

A It basically puts us on everybody’s watch list and keeps us on our toes. It helps us keep on edge because we know a lot of people are watching us very closely.

Q Did that intensify with Mr. Wanger’s retirement?

A It’s kind of like double-secret probation from “Animal House.”

Q Speaking of that, how is the transition going so far?

A Things are going fine. First, Ralph has not left. He still keeps an office here, and he has agreed to be in at least one day a week. So far, he’s been in the office a lot more than that. He’s actively doing some marketing for us.

Q How involved is Mr. Wanger in the firm’s day-to-day management?

A We talk often about the business and about stocks. He’s certainly providing a lot of advice. In fact, we just went through the analyst review process in which he has always taken a very active role on the domestic side and Leah on the foreign side. Both of them sat in when we were interviewing analysts about their progress during the year. Now they are not writing those reviews, but they have taken a look at my drafts and are providing me with some input.

Q What has been the biggest change?

A Ralph is no longer the decision-maker; he is a counselor. I’ve been writing analyst reviews for years. In the past, it meant that Ralph would make some major revisions and put his signature on it. This time around, he’s giving advice, and it’s my signature on it. I can accept his advice or decline it.

Q Ms. Zell’s fund has seen some outflows. Is that because the managers now running the fund are relatively new?

A The performance of our international funds has not been quite as strong. There’s been more turnover of people on our international side, so to some extent, it’s been a rebuilding effort.

Q How will you fix that?

A I had to take a really close look at what was going on on the international side as a part of this transition. I had a choice to go outside and hire somebody to be in charge of our whole international operation, or move people from within. I concluded that we have a great core team of people that are rapidly ramping up in our style and process. I’ve got confidence that over time, they are going to do well.

Q Have you brought in analysts on the international side?

A We have hired a Japanese analyst. He’s working in Japan, but we haven’t announced his name to shareholders.

Q Your company has done quite well by investing in stocks in sectors that have been beaten down in recent years. Now that these stocks have appreciated, what is the next move?

A There are a couple of things going on. Where we bought companies with risky balance sheets, there’s been a remarkable amount of balance sheet repair. Rather than say, “OK, we took risk, the risk paid off; let’s go sell the stock,” we’re saying, “Well, we took risk, the risk paid off; but now, because they repaired the business, it’s a much better balance sheet, so we can hold the stock for a while.”

Q So you are not selling them?

A That’s right. As part of this industry review process, we’re going to make some decisions.

Q How many industries do you review?

A Basically, we’ve got 10 to 12 of these industry reviews that we do. They take over an hour. The goal is to make a decision when walking out of that meeting whether to put more dollars into that industry or to take dollars out. Sometimes, we might keep it the same.

Q What are your thoughts as you get ready to begin this process again?

A It always seems to be a situation where your models are telling you there are some anomalies out there in the market. You always want to try to exploit the anomalies. If it works, a year later you say, “Wow, that was obvious.”

Q What anomalies do you see?

A There aren’t a lot of anomalies out there in the market. The only one that seems clear to me is that foreign stocks, in general, are more attractive fundamentally than domestic stocks. For the same growth, you pay a lower multiple.

Q Have you acted on that belief?

A We have taken our weighting in foreign stocks in the Acorn Fund from 8% to 11%, and we are continuing to find a number of good foreign names, so that weighting may rise even further.

Q What are your general views of today’s stock market?

A A year ago, the stock market was clearly oversold. It has bounced back to a somewhat more normal valuation level. The odds of a gain next year like we made this year are pretty low.

Q What about the economy?

A I think the economy is generally in good shape. I think the press has been overly bearish on the economy.

Q Are you bearish or bullish for next year?

A I think next year is going to be around normal. Normal means a high-single-digit increase in the market, but with a huge standard deviation around it.

Q You rely a lot on your analysts. What kind of people do you hire as analysts?

A We look for three attributes. First, we look for someone who is a stock nut. We look for people who think about stocks as they are walking down the street.

We’re looking for somebody with an economic mind. It’s basically somebody who can figure out how to make money. It’s not always the guy who makes the product or the guy who is manufacturing it. It might be somebody further down the process.

Then we are looking for people with the tool kit – you know, people with the accounting and finance skills.

SNAPSHOT

Charles “Chuck” McQuaid, 50, lead portfolio manager, chief investment officer and president since Oct. 1 of Chicago-based Columbia Wanger Asset Management LP, part of Columbia Management Group Inc., a FleetBoston Financial Corp. company

Assets under management: $15.7 billion

Career: 1995-present, manager of Columbia Acorn Fund; 1978-2003, director of research, Columbia Wanger; 1976-78, analyst, The Equitable Life Assurance Society of the United States in New York

Education: bachelor of arts degree in business administration from the University of Massachusetts, 1974; master’s degree in business administration from the University of Chicago, 1976

Columbia Acorn Fund (assets, $10.7 billion): year-to-date return, 42.13%; one-year, 37.6%; three-year, 13.02%; five-year, $15.66

Average small-cap-growth fund: ytd, 39.34%; 1-yr, 40.48%; 3-yr, -0.21%; 5-yr, 1.09%

Returns as of Dec. 8; periods over one year annualized Source: Yahoo Inc.