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What They’re Saying Now robert rodriguez By Dyan Machan With stocks Crawling Back from last winter’s abyss, and a reforming White House trying to restore some order to the Wild West of the markets with new regulation, we’re starting to regain confidence in our investments. But when it comes to our feelings about big-name investors—well, it’s going to take a lot of wooing to teach us how to love again. After a crash in which almost every mutual fund manager suffered big losses, investors are finding it hard to believe that any wise man or woman really deserves our trust. But there may be an antidote to this kind of skepticism: experience. Managers who have witnessed good markets and bad, over careers spanning decades, are more proficient than their peers at adapting to trouble. Indeed, during the bungee-cord drop and rebound of the past 12 months, U.S. stock funds that have had the same manager for 10 years or longer lost slightly less money than their peers, according to data from Morningstar. And they’ve also been more likely to show positive returns so far in 2009. That’s why we’ve focused this year’s installment of our “World’s Greatest Investors” series on a truly battle-tested group of thinkers. These four managers invest in such diverse fields as small-cap tech, corporate bonds and the foreign mergers-and-acquisitions market, but what’s more important is what they have in common: They minimized investors’ pain during the downturn, and they’re rebounding better than average in the current recovery. If some of these names sound familiar, they’ve earned the exposure. Bill Gross has become the country’s foremost bond investor in his 22 years at Pimco, Joel Tillinghast has logged 20 years managing one of the top funds in the massive Fidelity family, and Bob Rodriguez has averaged double-digit returns for two decades at FPA Capital. Our one newbie, Anne Gudefin, may be relatively young at 43, but she’s shined for almost a decade as an analyst and manager at the innovative Mutual Series fund family—and in last year’s crisis, she made calls worthy of a grizzled veteran. Of course, even the grizzled can get eaten by a bear: Warren Buffett is having the worst year of his career (see “Buffett: Waiting for the Bounce” on page 52). But overall, our group proves that a long-term view of the market and the experience to back it up are the keys to success. August 2009 Photographs (from top) by Gabriela Hasbun; Evan Kafka; Jude Edginton; Evan Kafka Wor ld’s G r eate st I nve stor s n Wor ld’s G r eate st I nve stor s n Wor ld’s G r eate st I nve stor s n Wor ld’s G r eate st I nve stor s SmartMoney smartmoney 43 joel tillinghast anne gudefin bill gross n Wor ld’s G r eate st I nve stor s n Robert Rodriguez CEO, First Pacific Advisors not compromise our investment guidelines!” Had his client “compromised,” he most likely would have spared himself a lot of pain. Rodriguez foresaw not only the real estate bubble but also the credit crisis and its aftermath. He says his insistence on moving into cash cost him $1.2 What he’s Buying billion in client withdrawals—a significant hit for First Pacific Adn Ensco International visors, a $10 billion firm. But today (ESV, $42) A “contract driller” that digs wells for big oil firms. Rodriguez might as well be wearing a neon sign that reads vindican BJ Services (BJS, $15) This company’s horizontal tion. In 2008 his FPA New Income drilling technology reaches bond fund returned 4.3 percent, hard-to-find oil; Rodriguez while his average competitor lost thinks it could double. almost 5 percent, according to n Rowan Companies Morningstar; in a quarter-century (RDC, $22) A deep-water that fund has never had a losing driller, another variation on year. Rodriguez’s equity fund, FPA Rodriguez’s favorite theme. Capital, didn’t fare as well due to a concentration in energy stocks that tanked when oil prices fell. But it finished ahead of the market, and even after last year’s losses, its annualized returns from 1987 through today are a stunning 13.8 percent. Rodriguez, now 60, grew up in poverty two miles 44 smartmoney from First Pacific’s office tower. “I remember signs that said no dogs, jews or mexicans,” he says. A high school adviser tried to steer him to trade school. But after magna cum laude honors, an MBA and three decades of investment success, Rodriguez is getting the last laugh. His vindication will be followed by vacation: In 2010 he’s taking a one-year sabbatical, after which he’ll be playing a supporting role at the firm. Rodriguez’s confidence doesn’t extend to the economy. Today’s rally is a mere head fake, he says, and the regulatory reforms proposed by the Obama administration will only “paper over” larger problems, like the nation’s soaring levels of spending and debt. He sees the U.S. entering a “repression”—more severe than a recession, but a step short of a depression—with a prolonged period of slow growth and high interest rates. To weather those trends, he’s buying high-quality bonds with one- to two-year durations. Most of his new purchases are in energy: He sees oil reaching $100 to $150 a barrel in three to five years, another ill omen for an early recovery. It’s partially because of the crisis ahead that Rodriguez is shrinking his management role. “This will be a long battle,” he says, and “I won’t be the optimum age to be the general of the army.” August 2009 Photograph by Gabriela Hasbun for SmartMoney Irrepressible on a spring morning in his Los Angeles office, Rodriguez takes a luxurious sip from his favorite green coffee cup. Then he mimics an uptight pension fund client who fired him in 2008 for moving his portfolio into cash: “We will In economic growth, as in auto racing, “it’s not the speed that kills; it’s the sudden stop.” It’s too soon to call a bottom, but “prospective returns are better now than two years ago.” n Wor ld’s G r eate st I nve stor s n Joel Tillinghast Portfolio Manager, Fidelity Low-Priced Stock Photograph by Evan Kafka for SmartMoney Joel Tillinghast owns around 800 smallish, often oddball companies in his $22 billion Fidelity Low-Priced Stock fund— more than five times the number in a typical portfolio that size. How does he get his ideas, let alone keep track of them? To answer, Tillinghast dives into the oversize blue recycling bin next to his desk. Papers fly. He grabs a fistful of stock listings put out by his research team and adds them to the inch of reports and newspapers spread out over his desk. “I have huge support,” he says. The plug for the analysts sounds like modesty— and might be shyness. Tillinghast, at 51, has run Low-Priced Stock since its inception in 1989. Over the past 10 years, he’s delivered an annualized 8.9 percent return, almost 11 points better than the S&P 500. That record makes him one of Fidelity’s all-time stars, but he lacks the outsize personality of, say, a Peter Lynch. If anything, Tillinghast’s sprawling fund of obscure stocks reflects his personal traits: a Pentiumchip brain that keeps track of the balance sheets of an extraordinary number of companies, with an affinity for numbers over people. “He’s like the genius professor who doesn’t quite connect to the real world,” says Jim Lowell, of research firm Adviser Investments. Genius didn’t spare Tillinghast from last year’s meltdown. He relies less than other managers on macroeconomics, and his fund did only slightly better than the broader market during the plunge. But in 2009 he’s shot back ahead, beating the S&P 500 by 11 August 2009 percent year to date. He attributes the success in part to the under-the-radar stocks in his portfolio: “Small-tomedium companies often find ways to compete” when the economy is dismal, he says. And his knowledge of those companies is truly thorough. When we quiz him about two random picks from his What he’s Buying holdings—YuYu Pharma, a Korean drug company, and the temp firm n Fossil (FOSL, $24) TrueBlue—he quotes their sales Watch and accessory maker could capitalize on retro and market-capitalization numbers trends in U.S. off the top of his head. n TrueBlue (TBI, $10) One potential upside of the Temporary staffing agencies crash, for curious investors: Lowlike TrueBlue often soar at Priced Stock reopened last year the beginning of a recovery. after being closed since 2003. Tilln Unit Corp. (UNT, $35) inghast has new cash to play with, Oklahoma oil and gas and with exceptions like Oracle company should thrive when and Safeway, he’s continuing to energy prices rebound. zero in on lesser-known companies. He’s also reluctant to call a rebound. In his mind, a few things have to take place first—a Chinese recovery and U.S. health care reform—but ultimately, he just shrugs about the timing. One thing he can say: “Your prospective returns are better now than two years ago.” smartmoney 47 n Wor ld’s G r eate st I nve stor s n Anne Gudefin Manager, Mutual Global Discovery to the copy of stock-picking bible The Intelligent Investor on his desk. “Okay, fine,” she said crisply in Frenchaccented English. “But how many of them spent their summer in China reading that book?” Greenwald moved Gudefin to the head of the line. Thirteen years later she’s first in a What She’s Buying different class: In four years running the $13 billion Mutual Global Disn British American covery fund, she’s outperformed 95 Tobacco (BTI, $54) Cigarette maker has pricing percent of global stock managers. power and high dividends. Foreseeing trouble in banking in n Eutelsat (ETL, $25) This 2007, she sold off financial stocks, French satellite company shorted European and U.S. stocks, has a huge moat against and had 58 percent of her fund competition. parked in cash by the time the marn Group Danone (DANOY, kets hit their worst stretch. While $10) Holdings in bottled Discovery took losses last year, it water and infant nutrition beat the MSCI EAFE world stock look recessionproof. index by 17 percentage points. Daughter of an American banker and French real estate investor, Gudefin grew up in Switzerland and France. Her post-MBA efforts to get into money management were thwarted at first—one company placed her in client services, stereotypical women’s work at 48 smartmoney old-boy firms. But she broke into the business at a hedge fund before joining New Jersey–based Mutual Series in 2000 as an analyst covering European stocks. That meant working closely with David Winters, a 2008 World’s Greatest Investor. More crucially, it meant an apprenticeship in Mutual Series’ ethos of investing widely outside traditional stocks and bonds. David Petso, a Boise, Idaho, financial adviser with $25 million of clients’ money invested in the Discovery fund, says he’s been impressed with Gudefin since she took over from Winters: “She’s very bold.” Gudefin certainly can’t be accused of running with the crowd. Hosting us on a gloomy day in her London office, she isn’t yet warming to the idea of a market recovery. Though she’s shrunk her cash position to under 40 percent, she’s staying conservative, buying ultrasafe utility bonds and high-dividend stocks while using covered-call options to hedge against a volatile market. She won’t call a market bottom until she sees large-cap stocks make a stronger move than they have so far. If investors would rather hear something more upbeat, well, tough luck. “I know I cannot be the popular girl at dinner parties,” she says with a nonchalant toss of her head that sends her earrings flying. August 2009 Photograph by Jude Edginton/Redux for SmartMoney Columbia University finance professor Bruce Greenwald recalls the day MBA student Anne Gudefin talked her way into his value-investing class. When Greenwald protested that he had hundreds of students on his waiting list, Gudefin pointed Bearish about stocks and real estate, Gudefin admits “I cannot be the popular girl at dinner parties.” “Give up the notion that the Dow is going to 14000,” Gross says, “or that the economy is going to soar to new peaks.” n Wor ld’s G r eate st I nve stor s n Bill Gross Co–Chief Investment Officer, Pimco Photograph by Evan Kafka for SmartMoney For Bill Gross, all the world’s a gloomy metaphor. Last year’s downturn? “Like living in a Three Stooges episode,” he says, comparing the string of bad news to Moe repeatedly slapping Larry in the face. The threat of deflation? Think Darth Vader. “Luke Skywalker is winning the battle at the moment,” says Gross, “but it doesn’t guarantee the end result.” Then again, even the Dark Side of the economy’s Force can’t seem to stop Gross these days. Last year he navigated the $150 billion Pimco Total Return, the world’s largest mutual fund, to a 4.3 percent return, nine points better than the average among his peers. The fund ranks in the top 4 percent among all bond funds for the past 10 years, according to Morningstar. “It’s quite possible that Bill Gross has made more money for investors than any other manager on the planet,” says Don Phillips, Morningstar’s managing director. We meet Gross in a Chicago hotel room prior to his giving a speech. The billionaire has just finished ironing his own shirt; he fears the suite’s lack of a minibar might represent “the new normal” in a world where consumers and investors will have to make do with less. Gross has been deeply involved in the government’s efforts to revive the economy. But while he acknowledges the need for the new financial regulations the White House recently proposed, snail-like growth will be the price of that safety net. “The next four to 12 years will not be investor-friendly,” he says. The new cosmic order involves 8 percent unemployment, anemic single-digit August 2009 annual stock market increases, and ultimately, once the short-term economic crisis is over, higher inflation. Granted, the master of bonds can seem excessively gloomy about stocks. After the tech bubble collapsed, Gross predicted the Dow would sink to 5000. “I’m still waiting for that,” says Daniel What He’s Buying Moisand, former president of the Financial Planning Association. But n Short-term bonds of Gross sees a major role for stocks in Dow Chemical and AT&T To boost his portfolio’s a slower economy. Investors should income, Gross is focusing seek stable income from stocks that on high-quality corporate pay good dividends like Cocabonds with interest rates of Cola and Procter & Gamble. He 7 to 8 percent. also recommends a bond portfolio n Treasury Inflationfocusing on high-rated companies Protected Securities like Dow Chemical or AT&T. (TIPS) With the government After that, it’s time to hunker facing deficits for the down. “Give up the notion that foreseeable future, investors the Dow is going to 14000,” says will need an inflation hedge. Gross, or “that the house is going to catch up in value to what you paid for it.” The world has changed, he says, because we consumed too much and saved too little. To return to the Stooges metaphor, we’ll all need a couple of nyuks in the years ahead. e smartmoney 51