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By Steven Mufson
Washington Post Staff Writer
Sunday, October 4, 1998; Page H5

Professional investors rarely admit they are wrong. When a strategy goes against them, they often say they were simply early.

That looks to be the case at Brandywine, the $4.5 billion mid-cap growth fund that had 70 percent of its assets in cash in January. Foster Friess, its famed manager, warned at the time about the impact of the Asian crisis, the risks of deflation and the imminent slowdown in U.S. corporate earnings. Not everyone agreed, however, and at the end of the first quarter of 1998, the Brandywine fund was left behind by other stock funds. It gained just 2.9 percent.

Friess's prophecy did come to pass, of course, and the stock market sagged, but not until the seasoned manager had decided to go with the flow and started buying stocks in the spring. The fund was fully invested again by the end of May. For the first three quarters of this year, an investor in the Brandywine fund would have lost 15.86 percent. Of 177 mid-cap growth funds tracked by Lipper Analytical Services Inc., 89 percent performed better than Brandywine.

"It couldn't have been more poorly timed," said Scott Cooley, an analyst with Lipper who owns the Brandywine fund through his 401(k) plan. "They were in cash when the market was going gangbusters, and in April they started buying stocks again. . . . They sold at the trough and bought in at the peak. Given that kind of timing, it's hard to put up very good numbers."

Investors have stampeded out of the fund. A year ago, Brandywine and its smaller sister, Brandywine Blue Fund, had $9.5 billion under management. At the end of the first quarter, assets sank to $7.7 billion. On Aug. 31, the two funds had just $4.85 billion in assets.

Friess said emphatically that he wasn't trying to time the market. He said he bailed out of companies at the end of 1997 because the Asian crisis had changed the fundamentals and earnings projections for companies Brandywine owned. Two smart moves: Brandywine got completely out of semiconductor and oil service company stocks.

"It is extremely important to emphasize that 75 percent of the companies we sold during the approximate 30-day period near year-end [1997] are now down from where we sold them -- many quite dramatically," Friess said. He added that his team "was well ahead of the vast majority of the U.S. investment community by predicting that the expectations for earnings were overly optimistic, in light of the Asian crisis."

"We didn't really 'switch to cash,' " added Chris Long, who works at Friess Associates, the company that manages the Brandywine funds. "We got out of individual companies where we saw earnings disappointments and had a hard time finding companies to switch into that met our strict price and growth disciplines. . . . So cash built up naturally as our selling outpaced our buying."

Friess disputed the notion that he bought overvalued stocks at peak prices. He said that since March 31, Brandywine has been ahead of the average fund in its mid-cap peer group. Long said the Brandywine Blue fund is starting to see net inflows of investments again.

Long said he thinks he has some bargains in his portfolio. The average price-to-earnings ratio of the stocks in the fund is now 17 times 1999 earnings estimates, while the companies are growing at an average rate of 42 percent. Long said the typical company in the Standard & Poor's 500-stock index is growing half as fast and is selling at a slightly higher multiple of 18.

Sharp moves in and out of stocks aren't unusual for Brandywine. A 200 percent-a-year turnover rate in its portfolio isn't unusual, Lipper's Cooley said. The fund went to 80 percent cash within three days of Saddam Hussein's invasion of Kuwait and also in 1974 after the Arab oil embargo, when Friess believed that uncertainty about energy costs threatened corporate profits. Both of those gambles paid off, as has Brandywine's performance over the long term. As of the end of 1997, the five-year annualized return for the fund was 18.4 percent, and 20.3 percent over a 10-year period. For the three years ending Dec. 31, 1997, it had an annualized return of 23.9 percent, despite a weak finish in December.

"They've taken a lot of heat. Some of the criticism is a little unfair," said Cooley. "They've moved into cash in the past and been right and people didn't gripe then."

Here's how the fund's top 10 holdings looked on Sept. 30, 1997, before Friess cleaned out the Brandywine portfolio: Compaq Computer Corp., EMC Corp., Cisco Systems Inc., Texas Instruments Inc., 3Com Corp., Applied Materials Inc., BMC Software Inc., National Semiconductor Corp., Conseco Inc. and Computer Associates International Inc.

The top 10 holdings as of Aug. 31 this year were: Computer Sciences Corp., Ascend Communications Inc., Compaq, Amgen Inc., Apple Computer Inc., WorldCorp., Tyco International Ltd., Office Depot Inc., Best Buy Co. and Staples Inc.

"We're looking at individual companies where growth prospects are good and that have a market share that can help them in this low-inflation, strong-dollar environment that makes price increases very difficult for many U.S. companies," Friess said.