"I think it was one of the more obvious investment themes in my career," he says. "It was quite obvious because metals had been starved for capital. Even if you could come up with a good project that could earn 10%, 12%, 14% on equity in the late '90s, who was going to get excited about that when you were being promised 100% returns on equity by simply putting up a Web page?"
"This is where we added something that the typical value manager did not see," he continues. "We went through a number of years where the prices of commodities went up and these guys sat on the cash. They didn't start to build new greenfield projects, they didn't acquire other companies. They just paid down their debt and waited because they didn't believe the prices. ... Clearly in my mind there's nothing quite so obvious that's hitting me over the head right now."
However, he does think that drugs make a worthy new poster child for an unfairly abused sector, and he's bulked up on pharmaceuticals in the past year, adding names such as Bristol-Myers Squibb Co., Johnson & Johnson, Novartis AG, Sepracor Inc. and Amgen and doubling his stake in Pfizer Inc. (Though some of the new names in the portfolio have come from the recent merger of the fund with another portfolio the firm acquired a few years ago.) He says that despite some issues that the pharmaceutical sector has had with sagging pipelines and regulatory roadblocks, drugs will always fight back and show redoubtable strength.
"This could be the bias of my generation-who have always felt this way one way or another-but my feeling is that drugs are part of the solution, they're not part of the problem to health care."
And he says that, in the bigger picture, analysts are generally too ready to throw in the towel on drug companies once they sniff an empty pipeline. Kleinschmidt replies mordantly: "What we've found is that-surprise, surprise-managements aren't oblivious to this any more than the analysts are. ... It's like the worst case gets priced in. And I'm not convinced that that's logical. And we've had a lot of success betting that drug companies can alleviate the situation more quickly than analysts think."
Because he eschews style boxes, Kleinschmidt is also willing to go into smaller-cap realms or even into growthier stocks if he can, as long as he thinks they'll meet his standards of five-year growth. His small names include cancer drug company Pharmion Corp., medical-device-maker Thoratec Corp., and reinsurance company IPC Holdings.
"I like names where there isn't any real sell-side support," he says. "These names are not so much out of favor. They are favor-less."
Though he learned a lot at David J. Greene, he says that the firm's institutional focus was less appealing, a realm where consultants pigeonhole managers into style boxes to create a level of statistical certainty where he thinks none really exists. Does he find that a problem among financial advisors as well?
"There was a trend that I think culminated in the late 1990s where everybody felt they had a Chinese menu approach to investing. You had to have one from Box A, two from Box B, three from Box C. But I think the experiences of the last seven or eight years or so with financial advisors who have prospered during that period is that they may simply want a manager who knows how to make money or preserve capital."