There's money to be made in Washington-area stocks. That was the theory behind the creation of two mutual funds that invest almost exclusively in Washington-area companies.
For years, investment professionals watched Baltimore, Washington and Richmond companies make their stockholders rich. And for years the pros said:
"One of these days, we ought to start a fund that specializes in Washington-area stocks."
In time, they did. In fact, two competing funds -- the Washington Area Growth Fund and the Growth Fund of Washington -- opened almost simultaneously last year.
Since then, theory and reality seem to have come together nicely. The two growth funds each have gained 21 percent, a performance that closely matches that of the Standard and Poor's 500 and the local 30-stock index published by Johnston, Lemon & Co., a regional brokerage firm.
The stocks in the funds did better than the 179 area stocks listed in the Washington Business stock table. This larger universe of stocks gained only about 14.7 percent.
However, the two funds lagged the Dow Jones industrial average, which gained almost 30 percent. To some extent, the DJIA numbers have been distorted by mergers, especially by the spectacular rise of General Foods shares. It should be noted, too, that it took some time for the new Washington funds to become fully invested. So the measure of their performance may not be precise.
In a way, the fund managers have been lucky. The funds opened when the DJIA was in the low 1,300s. What followed was a powerful bull market move that took the DJIA to 1,700. A fund manager can't get much better help than that.
The Washington Area Growth Fund (WAG) started life on May 30. A no-load fund, which now has $9.5 million, it initially sold at $15 a share. By Dec. 31, it moved up to $16.41, a gain of 9.4 percent. Since then, it has grown to $18.19, up 21.2 percent since inception. By comparison, since May 30, the Johnston, Lemon index was up 22.6 percent while the S&P 500 was up 20.9 percent.
Eight stocks make up 35 to 40 percent of the WAG fund portfolio. Fannie Mae (Federal National Mortgage Association) is the largest holding with 5.5 percent. The others are Hechinger, Marriott, Atlantic Research, Martin Marietta, USAir, McCormick & Co. and The Washington Post Co.
The full WAG portfolio contains 28 stocks, said portfolio manager Joseph A. Clorety II, senior vice president for investments at Acacia Mutual Life Insurance Co. WAG is run by the Calvert Fund, a subsidiary of Acacia.
Clorety said his stock selections brought him several "pleasant surprises." They included Circuit City Stores, Heilig-Meyers and Columbia First Federal Savings & Loan. His average cost on Circuit City Stores, the electronics retailer, was about $22. It closed Friday at $38, up 72.7 percent. Heilig-Meyers, furniture retailer, was bought at an average cost of $26.50 and closed at $39.63, up 49.5 percent. Columbia First Federal Savings & Loan, bought at the opening price of $10 and later at $12, closed at $19, up about 72.7 percent. Fannie Mae was bought at $20.25 and closed at $32, up 58 percent.
Clorety's only "unpleasant surprise," he said, was Entre Computer, a franchiser of retail computer stores. Entre has been caught in the computer industry shakeout. Clorety paid about $8 for its shares, now down to $6.75, a loss of 15.6 percent.
The Growth Fund of Washington, which opened for business on Aug. 7, sold initially at $10 a share, and, after a 50-cent commission, opened at $9.50 a share. It rose to $10.20 on Dec. 31, a gain of 7.4 percent. Since then, the shares have risen to $11.50, a gain of 21 percent. This compares with 20.9 percent for the S&P 500 and 23.1 percent for the Johnston, Lemon index. At year's end, the fund had 22 stocks.
The Growth Fund's five largest holdings are The Washington Post Co., Overnite Transportation Co., CSX Corp., Suburban Bancorp and Hechinger. Together, they account for 30.6 percent of the fund's assets. Growth Fund stocks are selected by portfolio manager Billy N. Joyner of Geico Investment Services Co. The fund, operated by Johnston, Lemon & Co., has assets of $40.9 million.
Joyner, too, has had some "pleasant surprises." They include Suburban Bancorp, which he acquired prior to the bank's decision to merge with Sovran Financial Corp. At present prices, the merger will give Joyner a 56 percent gain. Baltimore Bancorp, which he bought at an average price of $29.47, closed Friday at $43.50, a gain of 47.6 percent. Overnite Transportation cost $38.96 and is now selling at $53.50, a gain of 37.3 percent.
One of Joyner's "unpleasant surprises" was the sudden drop recently of PHH Group, which he acquired at an average cost of $38.10, and which closed on Friday at $32, a drop of 16 percent. The stock fell after PHH, a vehicle leasing and employe relocation firm, reported lower earnings for the first time in 105 consecutive quarters.
Joyner and Clorety take somewhat different approaches to stock selection. Joyner is a value-oriented investor who advises: "Buy a piece of a good business." Joyner tends to favor larger, rather than smaller, companies.
Clorety likes value situations, too, and tries to pick stocks that are relatively cheap compared with their true value. But he also keeps an eye out for small, fast-growing companies that may do well in the future.
Picking stocks for a local fund, Clorety has found, may limit his universe of companies, but it has its advantages. Clorety can drop in at Giant Food or Hechinger and get a feel for the business. He also is likely to hear about small local companies he might otherwise miss. "Living in the community," he said, "and paying attention, you can know things you might not otherwise know."
In 1985, T. Rowe Price Associates of Baltimore, the giant mutual fund company, hooked up with Coldwell Banker, a national real estate firm, and designed Realty Income Fund I, a real estate limited partnership. The fund quickly collected $90 million. The fund was a first for T. Rowe Price and a last for Coldwell Banker. When T. Rowe Price recently decided to do another fund, Coldwell Banker said it couldn't participate.
Coldwell Banker is a member of "the Sears financial network," which includes Allstate insurance and the brokerage firm of Dean Witter. The Sears and Dean Witter folks apparently didn't want Coldwell Banker to renew its partnership with T. Rowe Price, which sells its funds on a no-commission basis. Dean Witter, of course, has its own real estate partnerships, which do charge commissions. Beyond that, the relationship may have disturbed the unity of Sears' corporate image.
After Coldwell Banker said no, T. Rowe Price created its own real estate division. Then it hired the Coldwell Banker team that worked with it on the first fund. The seven-member team is headed by Reid G. Samuelson, who was president of Coldwell Banker Capital Management Services. Now, with Samuelson on the job, T. Rowe Price is preparing to market Realty Income Fund II.
John Hanson Savings & Loan of Beltsville, Md., was in the midst of a $6- to $7-a-share public offering when Baltimore Bancorp came along last week and offered to buy the thrift for $12 a share. Now that John Hanson has turned down the offer, the question brokers are asking is: How can John Hanson sell its shares for $6 or $7 when it's already been offered $12? The best guess among observers is that John Hanson will raise its offering price to about $8 a share. . . . The shares of Alex. Brown & Sons, the Baltimore brokerage house, offered at $23, soared as high was $32 on their first day of trading Friday. The shares closed at $29.
The United Savings Bank of Tysons Corner went public at $16 a share recently and immediately popped to $19 before drifting back down. It closed the week at $18. The United Savings Bank deal was a secondary offering. One of the principal shareholders in the thrift is IB Realty Corp., a former subsidiary of International Bank. Both entities are now subsidiaries of USLICO Corp., of Washington.
Correction: The price of Allegheny Beverage Corp. stock mentioned here last week was incorrect. The company's shares sold at $25.50 a share.