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Fund Times: Whitman Buys Microsoft and Intel

Plus, Harrah's bet a winner for Schoelzel and Ehlers, and real estate funds post strong returns.

Morningstar Analysts, 10/09/2006

It's a sure sign that the technology bellwethers have been in the dumps for a long time when Third Avenue Value's TAVFX Marty Whitman is buying them. Whitman bought Intel INTC last year, and now he's also buying Microsoft MSFT, according to a new shareholder letter.

Whitman is no stranger to tech--he's bought small-cap semiconductor stocks in the past--but it is striking to see him buy stocks that for so long had commanded premiums that would have kept Whitman away. Whitman bought 2 million shares of Microsoft in the April-July period. Whitman's strategy is to buy when things look so awful that the stock price provides a high level of safety.

"The common stocks of Fair Isaac FIC, Intel, Microsoft, and Nabors NBR were acquired at under 15 times earnings (after deducting excess cash holdings from the equity market values)," Whitman wrote. "In each instance, fund management believes that each issue has reasonable long-term prospects for increasing earnings from operations and/or cash flow from operations by more than 10% per year compounded."

Harrah's Bet Pays Off for Schoelzel, Ehlers
Harrah's Entertainment HET announced last week that it had received a bid for the company at a premium of more than 20% over its stock price. The stock is just over the line into large-cap territory, but only a handful of funds had big bets on the stock. Herb Ehlers and his fellow Buffett disciples at Goldman Sachs had nearly 6% of Heritage Capital Appreciation HRCPX in the stock. In addition, Scott Schoelzel of Janus Twenty JAVLX had 2.6% riding on the stock.

Real Estate Leads the Way in Third Quarter
Real estate funds produced the best returns of the third quarter. Real-estate funds returned a nifty 8.4%, followed by utilities and technology funds. Overseas, Pacific-Asia ex-Japan led the way with returns just shy of 6%. A bond rally helped long government-bond funds produce a strong 6.8% return for the quarter.

The worst places to be in the quarter were natural resources (negative 8.7%) and precious metals (negative 6.4%).

Large-Cap Funds Draw Flows
Flows into large-cap funds have gradually crept up as the categories have produced competitive returns. Four of the top seven categories were large cap in August according to Financial Research Corp. Large value led the way, followed by intermediate-term bond, foreign large blend, world allocation, foreign large value, world stock, and foreign large growth. No small-cap categories made FRC's top 20 categories list.

On a fund level, American funds claimed the top three spots led by American Funds Capital Income Builder CAIBX.

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