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Fund Times

Fund Times: Whitman Buys Microsoft and Intel

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

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   announced Monday that it had received a bid for the company at a premium of more than 20% over its stock price. (Premium Members of Morningstar.com can click  here for Sumit Desai's take on where the bidding will go.) 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  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. As evidenced by our table of third quarter returns, 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).

Franklin Templeton Launches New Fund
Although emerging markets have had a pretty big run in recent years, Franklin Templeton yesterday launched a new fund targeting small caps in emerging markets. The Templeton Emerging Markets Small Cap Fund will invest in a universe that has grown to about 15,000 companies, according to Franklin.

The fund will be managed by Mark Mobius.

The fund figures to be extremely volatile. We'd suggest investors wait to see if the fund has a respectable expense ratio and if management invests in the fund.

 

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