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The Eighth Wonder of the World
PIMCO NJF Equity Income Fund
Interview with: Jeff Partenheimer

Author: Dave Jennings
Last Update: , :
The atmosphere at Dallas, Texas-based NFJ Investment Group is relaxed, says Jeff Partenheimer, lead manager of the PIMCO NFJ Equity Income Fund. Take your time searching for the best companies paying the highest dividends, get them at the right price and just relax and wait. That process has beaten the benchmark Russell 1000 Value Index.

PIMCO NJF Equity Income Fund

A: I tell you, if you would look at some of the prices that some of these companies buy their own shares back at, it's pretty embarrassing. They tend not to be very good valuators of their own shares. I say, ""Give me the cash."" If I think you're undervalued, well, I'll be the first to buy more shares. Otherwise, I'll go somewhere else. It transfers power from the company management to the actual stockholder. That's why it's such a benefit to the shareholder to get that dividend.

Q: You're the long-term expert that has studied dividend-paying companies. Do you have a preferred list that you maintain?

A: What we do on the Equity Income Fund is we take the thousand largest names. We eliminate those names that we would never buy, obviously those that don't pay a dividend, and those that have a price-to-earnings multiple above the average of the S&P 500. At that point, we utilize some timing models such as price momentum – we don't want to buy that falling knife. We will use price momentum to let us know when a stock has reached a base where that knife has stopped falling. Also, we use earnings revisions. If analysts are just starting to cut earnings, they tend to herd just like individual investors do. When they start cutting, they tend to do it in slices. If they start cutting, you can expect three or four to be coming down the pipe. So, these models keep us from buying these stocks too early, which is the worst thing a value manager can do. At that point, we probably have about 300 to 500 names that we can build a portfolio. Right now we have 43 names in the portfolio. It's easy to get investable names in our process.

Q: The typical range of a portfolio seems to be between 40 and 60 names.

A: I think that gives you enough leeway to where you can have some capacity to sell the product, but it also allows you to show and make an alpha. If you have 300 names, you end up turning into a closet indexer and you're just tracking the index and anybody can do that. To create alpha like we have, you have to take risks; you have to move away from the pack and you have to have a limited number of names.

Q: When it comes to dividend payers, there are more details to consider, of course, when it comes to buying and selling what the team argues over.

A: That is important. We do about 85% of our own research in-house. We will look at Wall Street research facts and figures. We don't care about their opinions. Everybody realizes now about how distorted their opinions are. We've been utilizing that fact since we formed the firm. In buying these names, our job is eventually to be able to sell these names to a growth manager. If I had to find another value manager to sell my stock to, then that is the greater fool theory coming into play. You're not really going to make good returns that way. The good thing that NFJ has done is they've added a second layer of which I'm one. Cliff Hooper and I both started out as credit loan analysts at the large banks here in Dallas, so we saw a lot of industries. But we also know our way through cash flows statements, income statements and balance sheets, and loan covenants in financing. I'm also a CPA. That really helps out, too. Finding those names that aren't going to blow up in a year is key. Since our turnover is slow, that company has to have the financial wherewithal to get its act together. We can't have it be one foot in the grave and then buy it and hope for the best. That’s not what we do. We're looking for quality names that will turn around eventually. We get the question, what's the catalyst going to be on that name?

Q: That is a frequent question asked of value fund managers.

A: What's funny is if you write down what the value manager says is going to be the catalyst, I will bet you more times than not, it is going to be something completely different. That is what you have to realize in this business. Our forecasting ability as humans is severely limited. This is a fluid environment we're in. I can tell what I think the catalyst is gong to be, but my experience more times than not has been completely different. The lesson here is if you buy names right and cheap, then good things will happen to you. If you are counting on one thing to happen like a growth manager might do, that is a recipe for disaster. Our process gives you a cushion. It's more of a relaxed investing atmosphere.

Q: You sleep better at night is the expression.

A: That's right. The process here is very methodical. What we buy, we hold and just wait for those good things to happen. I might mention we also run a small-cap product that in 1999 had nearly 20% of its names taken out by other companies. That really helps augment your returns in down times.

Q: Do you have your own equity in the firm?

A: We all invest through our company 401k options. We have the option to invest NFJ Equity Income and the Small Cap Value Fund.

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