Manager, Refusing to Spook, Keeps Money-Center Stocks

Last fall, as turmoil in Asia caused U.S. financial markets to quake, many investors in money-center banks dumped their shares and ran for the hills.

But portfolio manager Nancy Tengler, who has stakes in J.P. Morgan & Co. and BankAmerica Corp., stood her ground.

"Our clients pay us to stick to our strategy, and we don't begin selling unless companies fall into our sell range," said Ms. Tengler. "Wall Street has a short-term focus. We like to keep stocks for three to five years."

Ms. Tengler practices her "we are investors not traders" philosophy at Global Alliance Value Investors Ltd., a Lafayette, Calif., investment company where she is president and chief investment officer.

She launched Global Alliance in September after polishing her investment techniques at UBS Asset Management for five years.

Global Alliance, which has $100 million of assets under management, currently allocates almost 20% of its portfolio to financial companies, of which a considerable portion are commercial banks.

According to Ms. Tengler, 40, the firm's assets returned 30.7%. She added that while that return was slightly behind the market, "it was ahead of Lipper Analytical Services Inc.'s growth and income index and Lipper's income and equity income (indexes), which fall into the value category."

Ms. Tengler's optimism about the banking sector comes at a time when stocks of money-center and regional banks are lagging the market, which has recently enjoyed a much-ballyhooed rally.

Last week, the Dow Jones industrial average rose 10.5%. Other indexes also climbed. Banks, on the other hand, still appear to be dawdling in spite of several days of overall market rallies. Last week, the S&P bank index advanced 7.6%.

Nevertheless, Ms. Tengler said she plans to invest in more banks, particularly regionals, if bank stocks remain weak.

Some of her biggest holdings include Mellon Bank Inc., First Union Corp., J.P. Morgan & Co., BankAmerica Corp., and U.S. Bancorp. She also has a small position, just 1% of Global Alliance's assets, in Wachovia Corp.

Bank stocks, insisted Ms. Tengler, are some of the best buys around because they are increasingly drawing more of their revenues from fee income as opposed to loan income.

In particular, Mellon, one of her biggest holdings, draws more than half of its revenue from nontraditional avenues such as trusts and mutual funds.

"Most people thought the company paid too much when they acquired the Boston Company and Dreyfus, but we recognized the value of those franchises and continue to like Mellon's story," Ms. Tengler said.

Another appealing aspect about some bank stocks is their cheapness compared to the overall market.

First Union, which she owns because of the position she held in CoreStates, is one of the most inexpensive bank stocks, she said. Ms. Tengler is quick to add, however, that a cheap stock does not a great investment make.

"We don't want to fall in the value-manager trap," explained Ms. Tengler. "Some stocks can be terminally cheap, and they are cheap for a good reason. Those are stocks that we do not want to own."

But she said she does want to own more of First Union, which is in the process of acquiring CoreStates, because, she said, it is "one of the best- run banks in the country."

"There is apathy in the stock because people do not like all of the acquisitions that they have made," said Ms. Tengler, referring to First Union's purchases of Signet Banking Corp. and Wheat, First Butcher Singer in 1997. "Investors think too many acquisitions are dilutive. But the company has historically delivered on cost savings when it comes to these transactions."

She added that First Union is likely to become her biggest holding as she continues to buy on the stock's weakness.

Ms. Tengler approaches companies with a fairly innovative analysis called relative dividend yield.

Dividends provide investors with key information about the company's management and its earnings outlook, she explained.

Ms. Tengler said she and her team also "rigorously analyze" each company by applying what she calls "12 Fundamental Factors."

They include the Buggy Whip Factor, or assessing whether the product is obsolete; Niche Value, which determines whether the company has a strong franchise; and assessing if top management has relevant or deep experience. Other factors include price/earnings ratio, operating margins, and cash flow.

It is this unique analysis that kept Ms. Tengler's hand off the sell button-particularly when Southeast Asia was in the middle of a meltdown.

"Asia was overblown," she said. "J.P. Morgan is a diverse financial services company that is very well-managed and, yes, there will be some impact on fee income but not to the extent that people think."

The company is likely to thrive in this favorable interest rate environment and strong global economy, she said. And BankAmerica's exposure, she said, is just not meaningful.

Relative dividend yield and vigorous analysis also make her cautious about investing in the "next hot bank merger."

She pointed to U.S. Bancorp, a company whose name is often bandied about as a prime takeover target.

"The bank has had a great year as far as stock appreciation, based on its merger with First Bank System," said Ms. Tengler. "However, we may sell it next year, and we would not override that sell just because the company may or may not get acquired. You get killed that way."

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