Fund Manager’s Optimism Pays Off for Clients

A bigger stock market bull than Roger Engemann may not exist. In fact, there may be few people on Earth as optimistic about life in general as Engemann.

The 50-year-old Pasadena investor, whose Roger Engemann & Associates manages $1.3 billion for 13,500 clients, is an anomaly in his field. While most money managers seem to think they’re paid to worry, Engemann’s hallmark has been an unabashed exuberance--for the economy and the long-term outlook of common stocks.

With the Dow Jones industrial average topping 3,000 last week for the first time, many investors fear that the market has peaked. There still are plenty of influential people on Wall Street who believe that an economic crash lies ahead.

Sitting in his spacious and elegantly furnished office in Pasadena, Engemann lights a Don Diego cigar and smiles softly as a visitor lists the bear case for a weak economy in the ‘90s--and lower stock prices.

“I love hearing them say that,” Engemann says. Stocks, he notes, usually need a “wall of worry” to climb. So he’s happy to let the bears build the wall. He has no doubt that his stocks will scale it.

The bears can’t argue with Engemann’s success after 20 years as a money manager:

* A sum of $100,000 invested with him in 1970 would have grown to $3.6 million by now, he says. In contrast, $100,000 in the benchmark stock index, the Standard & Poor’s 500, would have grown to $954,000.

* For the past three years alone, independent investment monitor CDA Investment Technologies lists Engemann as 15th best of nearly 400 fund managers nationwide, with an 88.3% stock gain versus 60.8% for the S&P; 500.

Yet Engemann’s investment strategy is disarmingly basic: Buy good stocks, stick with them, don’t try to time the market, and stay vigilant over what you own.

He disdains bonds and commodities as growth vehicles. “My strategy has always been to make the most money for my clients,” he says. “That sounds simple, but I believe most (managers) don’t try to do that.” If you want to make the most money, he says, “stocks clearly do better than anything else over the long term. If a guy has patience, he’ll make money.”

Market timing, rather than long-term investing, is “your first instinct” as a money manager, he admits. “But as I got older, I decided it’s a fool’s game.”

Indeed, in one corner of his office he keeps a large chart showing the performance of stocks, bonds, money market investments and inflation since 1925. The stock line tracks far above all of the others. If you understand that fact, you’re already a step ahead of the game, Engemann says.

And which stocks will do best? To Engemann, that too is easily answered: companies that grow earnings at a faster-than-average pace. “I’m totally oriented toward classic growth companies,” he says. Other investors may try to shop for stocks that look cheap by some measure. Engemann’s strategy is simply “to try and buy the best companies. And we’re willing to pay up for them.”

His portfolio is a roster of some of America’s most successful big companies of the past 20 years--such as Walt Disney, drug giants Eli Lilly and Merck, and retailer Wal-Mart. (Wal-Mart founder Sam Walton is a personal friend.)

Engemann or a member of his staff of 50 visits each company at least once a year. “We try to learn, learn, learn--then we’ll decide if the story is getting better or worse,” he says. There have been mistakes, of course. MCI Communications was a poor choice early in 1990, Engemann admits. The company’s growth prospects have clearly deteriorated. “But we never beat ourselves over a mistake. We sell it and move on,” he says.

Today, some Wall Streeters insist that Engemann’s favorite companies are either too high-priced or that they’ve been too lucky for too long and are destined for a fall.

Engemann, who hunts ducks for recreation and seems to know a sure shot (his stuffed successes decorate his office), says that’s ridiculous. His typical growth stock sells for 18 times this year’s estimated earnings per share, he says, and “I feel that’s a very comfortable price to pay.” His comfort is high because his confidence in the firms’ growth is high.

“These companies were growing at modest rates 10 years ago--maybe 12% a year,” he says. “I think it’s more than a coincidence that they went to 18% to 20% annual growth around 1986.” That higher growth has been driven by a combination of factors that aren’t going to disappear in the ‘90s, Engemann says--expanding global markets, low inflation and “gigantic” expenditures on research and development.

At some point, these stocks will become too expensive, Engemann admits--but probably not until they are selling for the 40 to 60 price-to-earnings multiples of the last big growth-stock era, in the early 1970s. What happens when these stocks hit 40 times earnings? “I’m hoping that that takes 10 years. Because when it happens, I’m out of business,” he laughs.

Underlying his excitement about growth stocks is a deep-seated optimism about the future of the economy. A father of four--the oldest is 19, the youngest 5--Engemann believes that America is on the verge of a decade of low inflation, high savings and investment, and healthy growth.

“Inflation is a political thing. You can decide to have it or not have it. We have decided as a nation not to have it,” he says, and the Federal Reserve is carrying out that mandate. An economist by training, he believes that inflation will average just 3% a year for the next 10 years. And with low inflation, investors will increasingly be willing to pay higher prices for stocks of fast-growing companies, he believes.

Meanwhile, the aging baby boom generation--and their parents--will be saving at a far higher rate in the ‘90s than in the ‘80s, Engemann says. That will provide capital for investment in America. At the same time, he still sees domestic consumption growing at a fast enough rate to spur good economic growth. And the important kicker for the American economy will be demand for our goods and services from overseas, particularly from the developing economies of the Pacific Rim, he says.

Soft-spoken and amiable, Engemann was born in Hollywood, the son of an insulation contractor. Though the family was poor, he got to college, studying economics at the University of Oregon and then UCLA’s graduate school. In 1969, while working as a brokerage analyst, he decided that the time was ripe to strike out on his own in money management.

His success in attracting money since then has mostly been by word of mouth, he says. “In my naive way of looking at it, if we invested well, I figured word would get out.”

His minimum account requirement has remained the same since 1969: $100,000. In 1986, he started the Pasadena Group of mutual funds, which accept investments as low as $2,500 from individual investors. The Pasadena Growth fund today has $135 million in assets; the Pasadena Fundamental Value fund, designed for older investors who want a mix of stocks and bonds to lessen their risk, has $7.5 million in assets.

Engemann has $4 million of his own money in the Pasadena Growth fund, which holds many of the stocks he owns for big clients. “I would never put other people’s money in something where I myself don’t invest,” he says.

Of his unshakable bullishness, he says merely, “I think optimism has always paid.” Gazing out on a rose garden in glorious bloom on his office patio, he adds, “It’s been a miracle life for me.”

‘PIGGYBACKING’ ROGER: HIS TOP STOCKS

These 12 stocks now account for slightly more than half of the money in Roger Engemann’s client accounts--so they’re his biggest bets for the 1990s, if an investor wants to piggyback his style:

52-week Fri. ’91 Stock Business high-low close P-E* Carnival Cruise cruise lines 24 7/8-10 3/4 24 5/8 15 Circus Circus casinos 70 7/8-35 3/4 65 17 Eli Lilly drugs/biotech 90 3/8-64 1/2 80 17 Fed. Home Loan home loans 84 1/2-30 1/4 80 3/8 9 Merck drugs 113-71 5/8 111 21 NCNB Corp. banking: SE U.S. 44 1/4-16 7/8 39 3/8 12 Nordstrom retail 40 1/2-17 1/4 36 3/4 21 Philip Morris tobacco/food 71 3/4-40 7/8 68 1/2 14 Price Co. discount retail 56 1/2-26 1/2 55 1/2 21 Reuters information 71 1/8-32 1/8 45 1/2 15 Wal-Mart discount retail 44 1/4-24 42 30 Walt Disney leisure time 136 1/2-86 117 1/4 19

* stock price-to-earnings ratio based on estimated 1991 earnings per share (analysts’ consensus estimates, from Zacks Investment Research)

All stocks trade NYSE except Carnival (Amex) and Nordstrom, Price and Reuters (NASDAQ)