Monday, August 11, 2003

Salvage Operation

David J. Williams is a former Navy pilot. He has the stomach for flying close to the edge. The fund he comanages, Excelsior Value & Restructuring, invests mostly in companies trying to avoid a nosedive into oblivion.

Williams' fund, one of the Excelsior funds advised by U.S. Trust, has 60% of its holdings in firms that are restructuring their balance sheets, selling divisions, laying off employees and the like. Another 20% are likely acquisition targets in consolidating industries. The rest are stocks that just look cheap.

In the ten-plus years since its founding, this no-load fund has grown to $1.6 billion in assets. Of late, performance has been fair: For the 12 months through June it gained 2%, against a 0.3% advance for the S&P 500. Williams admits he cleaned house in 2002, hitting the eject button on stocks like energy traders Calpine and Dynegy. "I had too much crap in the portfolio," he confesses.

Nevertheless, the fund has a 15% annualized return over the past decade versus 10% for the S&P. FORBES grades it B for long-term performance in both up and down markets.

Williams, 61, got his start in the business at the tail end of the 1973-74 crash, joining T. Rowe Price as a portfolio manager following a post-Navy M.B.A. from Harvard. In 1987, when an ascendant Japan Inc. appeared to be eclipsing America as the world's economic superpower, he signed on with U.S. Trust (now a subsidiary of Charles Schwab & Co.). There he concluded that American business would be forced to restructure in order to stay competitive in the global economy. This spurred the launch of Williams' fund at the end of 1992.

One of its first bets was on a beaten-up IBM , then cutting deeply into its work force and posting breathtaking net losses: $6.9 billion in 1992 and $8 billion the year after. On a split-adjusted basis, IBM's stock traded in the low teens, half its level five years prior. Williams bought. By July 1999 IBM shares were changing hands at $139. Williams has reduced his position in IBM since then but still owns it, along with a handful of other tech outfits. "The fundamentals really haven't changed much for the better yet," he muses, but "when they do, those stocks are going to fly."

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