Up Close and Personal, Globally

7:00 p.m. EST February 20, 2001 -- CHAT EVEN BRIEFLY with Tom McIntyre, and it's clear this mutual-fund manager is a people person. And while it seems as though he could get along with just about anyone, he devotes much of his energy to getting to know such top executives as Joseph Nacchio, head of Qwest Communications International (Q) and Jeff Skilling, the new chief executive of energy concern Enron (ENE).

While sizing up company managements is part of most stock pickers' approaches, it's at the heart of McIntyre's strategy at the $63 million Dessauer Global Equity fund (DGLEX). McIntyre, 45 years old, and research analyst Rob Flynn, 26, regularly depart their Cape Cod, Mass., office to attend annual meetings and analyst conferences, searching for something more than the earnings estimates and other numbers they — and everyone else — can find in cyberspace. Explains McIntyre, "What you can't get on the Internet is that intangible confidence in a management team, and you need that confidence when something doesn't go right."

McIntyre stresses that this sort of confidence doesn't happen overnight, but instead by closely trailing a company for years. While the analysis may start by securing lunch or dinner with top executives at a conference, it may eventually lead to the friendship McIntyre developed with Arthur Goldberg, the former Park Place Entertainment (PPE) chairman who died last October.

So far in 2000, most things are going right for the fund: Its 8.79% return, according to Morningstar, makes it the second-best-performing world-stock portfolio year-to-date. (RS Partners fund (RSPFX) is leading the pack with 10.88%.) Moreover, over a three-year period, the no-load portfolio gained 12.80% annualized, putting it in the top quartile of its category.

But the downside of McIntyre's loyalty became apparent last year, when the fund lost 14.4% — faring worse than both the S&P 500 and its fund peers, which shed 9.1% and 10.56%, respectively. Most of the damage was done in the fourth-quarter tech sell-off, and that's when McIntyre's faith in the managers he cultivates came into play. Communications-equipment maker Scientific-Atlanta (SFA) — the fund's largest holding, at almost 14% of assets — dropped to $32 from $75 between Labor Day and New Year's Eve. But it has bounced partway back, closing at about $52. Says the fund manager, "We will not let the market force us out of our investment positions just to avoid a short-term decline."

In other words, investors had better be prepared to ride the waves. Dessauer Global Equity's standard deviation — a measure of volatility — is almost twice that of the average world-stock portfolio. That doesn't surprise Morningstar analyst Kunal Kapoor, who notes that the fund is firmly rooted in the large-cap growth arena and holds sizable stakes in tech and telecom. In addition to girding themselves for big bumps, Kapoor says, potential investors should watch for overlaps with their domestic portfolios, since McIntyre owns such popular holdings as AOL Time Warner (AOL), Citigroup (C) and Enron.

The fund's concentrated nature — it holds just 25 names on average — adds to the volatility. But the small number is also what enables McIntyre to focus intensely on his companies. He says he studies just 40 at a time — counting his holdings, most of which have been in the portfolio for several years.

McIntyre starts with a top-down search for industries best suited to the global marketplace, from technology and telecommunications to financial services and health care. Then he tries to determine which companies are currently leading the sectors — or will soon be out front. In health care, for example, he now owns two global goliaths — the U.K.'s GlaxoSmithKline (GSK) and Switzerland's Novartis (NVS) — as well as a smaller Irish player, Elan (ELN).

Deconstructing a company's balance sheet is also key to McIntyre's decision-making and that's fitting: He started out as an accountant, first in a public accounting firm and then on the corporate side, putting together the 10Ks and 10Qs (annual and quarterly reports) filed by public companies. Financial strength, he says, means that a company can pull itself out of trouble or take advantage of others' weaknesses: "You can be a buyer when other people want to be a seller."

A case in point: Diversified manufacturer and portfolio holding Tyco International (TYC) sports a healthy balance sheet and ample cash flow. Last week the company issued $2.25 billion in convertible bonds, and at the end of December, it agreed to purchase Lucent Technologies' (LU) power-systems business unit. "I don't think Lucent is going away, but they're not thriving," says McIntyre of the former holding. "They're a seller of assets at a time of economic weakness, so they're not getting top dollar, but they need liquidity. And others like Tyco are taking advantage of it."

McIntyre strives to buy top-grade companies when they're out of favor. But he doesn't look for low price-to-book multiples, as value managers do. Rather, he watches for times of uncertainty that can offer a lower entry point into a high-quality name. That's why he purchased Nortel Networks (NT) late last year, after it fell to the low $30s a share from $80. McIntyre says he asked himself, "What's one of the reasons Lucent is struggling?" and came up with the answer "Nortel."

He knows he'll have to be patient — especially in light of the first-quarter earnings warning Nortel issued last Thursday. "Deep disappointment," is how McIntyre summed up his feelings on Friday. But he believes Nortel's problems are tied to the economy and that the company will continue to win big contracts overseas. Especially at its current price of about $20, he's sticking with the stock. Nevertheless, last week's Nasdaq rout was tough on his fund, knocking its year-to-date return down to 8.79% from 15% and costing it the top-performer's slot.

Currently, McIntyre has between 55% and 60% of the fund's assets in U.S. companies — more than the average world-stock fund's 42.5%, according to Morningstar data. Would-be investors, says Morningstar's Kapoor, "have to realize that your foreign exposure is really pretty minimal." The balance of the fund's holdings are in Canada and Europe; in Japan, McIntyre says, he sees a lack of concern for shareholders. Similarly, he avoids family-dominated companies, for fear of agendas that don't serve the interests of nonrelatives. Which brings us to another of his basic stock-picking principles. Says McIntyre: "Make sure you own shares of companies with management teams that want those shares to go up."