Game Changer

One on One: "That was a fluke caused by Alan Greenspan"

Growth-and-income funds don't usually post triple-digit gains. Then again, Robert Loest of IPS Millennium Fund is not your ordinary money manager.

He’s the first to admit that the Internet glam-stocks that fill his portfolio are “scary stuff.” And he doubts he can replicate the 118% return he achieved for his $280 million portfolio in 1999 since “those things go up and down like pogo sticks on steroids.”

He even calls those results a “fluke,” resulting from Federal Reserve Chairman Alan Greenspan’s floating huge amounts of capital into the system to calm Y2K fears.

Such proclamations are standard fare at Knoxville, Tenn.-based IPS Advisory Inc. And Mr. Loest, 56, who agreed to be photographed while rollerblading in Florida during a break from a conference, has become better known for being a Chicken Little than for his returns.

Despite his growth-and-income mandate — he has about one-third invested in dividend-paying stocks — Mr. Loest is frustrated with stodgy old-economy companies that are getting squeezed by leaner Internet rivals and almost by process of elimination, he’s got a nearly 70% weighting in technology. So Mr. Loest is warning his shareholders they may be in for a rough ride.

The IPS website uses legal boilerplate to explain risk, but then Mr. Loest interjects his “human language version.” First, he tells investors that “stock prices are volatile…Well, duh.” On capital gains distributions: “…you may have to pay for returns you didn’t earn. Just try and find somewhere you don’t though. Dismal.”

On risk tolerance: “If you [can’t stand risk], go bury your money in a jar or put it in the bank and don’t bother us about why your investment goes south sometimes.”

Jack A. Brill, an adviser in San Diego who is the co-author of a guide to socially responsible investing, “Investing with Your Values,” says he’s a fan of Mr. Loest, who bars from his portfolio the stocks of tobacco companies and those that test on animals .

The plain talk shouldn’t be surprising for a portfolio manager whose last job was as a blacksmith. After spending more than eight years talking stocks with a financial planner who owned stables in Knoxville, Mr. Loest decided to join him in managing money.

A year later, Mr. Loest, also a former biologist and naval officer, ventured out with partner Greg D’Amico to start IPS Advisory.

Q: Why have you been using plain talk to communicate with shareholders?

A: We wanted to write a risk disclosure that would slap people in the face a little bit.

Before 1995, when we were in an industrial economy, the risk was you were in a company that went down 50% and it would take 10 months or a year to make up that kind of loss. So it was a disaster. The risk today is that you’re not in a company that goes up 1,000%.

Portfolio managers have to manage in a very different way. What that means is that investors are exposed to opportunity risks. And the portfolio manager misses stocks like (cell phone maker) Qualcomm Inc. If you lose 50% in some company, you can make that up in one day on another company.

Q: You sold Qualcomm 18 months ago?

A: I had sold Qualcomm because I was worried that its handset manufacturing business was going to drag it down. And about a week after I sold it, they announced they were going to sell their handset manufacturing business. The stock took off, and I just sat there with my mouth hanging open waiting for it to come back down again. I shouldn’t have done it and we paid dearly. Now Qualcomm is way down and we’re buying.

Q: Why don’t you think you’ll be able to repeat your results of last year?

A: Nobody should expect the kind of returns that we had in 1999. That’s simply not something we’re going to be able to repeat. That was a fluke caused by Alan Greenspan. That wasn’t luck in stock picking on our part.

Q: How do you justify being a growth-and-income fund with so much tech?

A: It’s a growth fund with a secondary objective of income stocks. It’s not designed to generate income to shareholders. It’s designed to buy income stocks to moderate the volatility of the super high-growth part.

Back in the old days, growth-and-income funds used to invest in companies with such high dividends that there was actually income left to distribute to investors every quarter. But over the decade, the dividend yield on the S&P 500 has dropped so low that even legitimate old industrial-era growth-and-income type funds have very little income left over. So the concept of the growth-and-income fund, in the sense that the fund bought a lot of dividend type companies, is sort of gone.

Q: Where are opportunities income-wise?

A: We’ve been buying a lot of electric utilities. One reason is for the income component, to provide some stability to the portfolio. The other is that deregulation has resulted in electric utilities securitizing or in some way monetizing their old uneconomic plants and equipment and reinvesting the proceeds into far higher-return, faster-growing assets, like fiber optic lines and new super high-efficiency natural gas power plants. Their earnings growth rate has jumped by a huge amount and their return on invested assets has jumped by a huge amount. Because of temporary uncertainty about deregulation and Greenspan’s raising of rates, their prices have plunged. It’s the best value play out there.

Q: The flip side of deregulation is that some of these utilities won’t make it.

A: Any time you have deregulation, most of the players lose and you have a lot of consolidation. And you have a few big players which take market share from everyone else. In this case, it’s companies like [power producer] AES Corp., Duke Energy Corp., [electricity generator] Southern Co., [natural gas producer] Enron Corp. Companies like this that are transforming themselves from just simply power generators or natural gas or power transmitters into intellectual capital-based companies. They are using intellectual capital to design trading systems for energy futures. And Enron is even going to start adding bandwidth futures.

Q: You sold all your real estate investment trusts. Why?

A: We realized we could get almost as high a dividend yield with electric utilities, but with a heck of a lot more capital appreciation potential. They’re [Reits]just not adding value like they used to. I don’t see that there’s anything underlying the Reit industry that has changed in the last few years that would add value. Interest rates are higher and until they go back down, their profit margins are going to be lower.

Q: What have you been buying on the growth side of the fund?

A: Healtheon/WebMD. I bought that one at the end of January. That’s one-seventh of the economy. Most of that sector is still living in an era of paper ledgers and records and hand-cranked adding machines. If they’re going to get costs down and improve services, the only way they have left to do it is to increase the efficiencies with which they process insurance claims and process information.

And, of course, Qualcomm.

Q: And what have you sold?

A: We’ve just recently sold Amazon.com Inc. It’s been going sideways since January 1999. What’s happening is they’re paying out so much of their income to enhance the services on their website that they don’t have any left for themselves. All the value is passing through Amazon to companies like SilkNet Software Inc. that provide one-click shopping.

Q: SilkNet is one of your holdings. Is this your new thinking?

A: Yeah. It makes more sense to buy the electronic company enablers than to buy the electronic commerce companies themselves.