William F. K. Schaff and Gary G. Pollock freely admit they're not great marketers. That may be why you haven't heard of their San Francisco-based financial-advisory firm, Bay Isle Financial Corp., even though it manages about $1 billion in assets.

And although a lot of observers say financial advisors aren't equipped to directly manage investment portfolios of individual securities, this 22-person fee-based firm quietly has distinguished itself by doing just that. Bay Isle offers its own asset-class products for institutions and individuals, and it has been retained as a subadvisor by two mutual fund complexes. It also manages large-cap value investments and equity REITs in wrap programs for other advisors and does financial planning for high-net-worth individuals.

Both partners have a long history of performing financial analysis, but the 43-year-old Schaff, Bay Isle's CEO and chief investment officer, has long demonstrated a flair for numbers and evaluating companies with painstaking detail. Since 1988, one segment he has focused on is large-cap value investing, and his record has attracted many institutional clients to Bay Isle. In addition, he has managed REIT portfolios for clients and now co-manages the Undiscovered Managers REIT Fund with Bay Isle's Ralph Block. He also has followed tech stocks for years and now manages the Berger Information Technology Fund.

Although experienced at financial analysis as well, Pollock's forte is communication and financial planning for high-net-worth individuals. Pollock, 59, is Bay Isle's president and is in charge of its individual accounts, which now total between $400 million and $425 million in assets, with an average account size of about $1.1 million. The firm has about 370 individual clients, whose ages range from 20 to 103.

Bay Isle was incorporated in 1986 and opened for business in 1987. From the beginning, Schaff and Pollock knew they wanted to capitalize on their extensive analytical experience. Born in Korea and adopted at age five by a Pittsburgh family, Schaff earned a master's degree in engineering from the University of California, Davis, and did thesis work in both engineering and computer science. In 1980, he became a business analyst for Chevron Corp., where he met Pollock. A native of Canada, Pollock earned a doctorate in chemical engineering from McMaster University in Hamilton, Ontario. He worked for 20 years at Chevron and held financial, management and strategic-planning positions.

One of the projects with which Pollock was involved in the early 1980s was Chevron's acquisition of Gulf Oil. At one point, Pollock put together a team to evaluate whether Chevron should keep or sell Gulf's chemical business, and he asked Schaff to participate. "I got a suggestion from a friend of mine to choose Bill because he worked harder than anybody and was good," Pollock recalls. After that, they ended up working together on other projects at Chevron.

By 1985, Schaff wanted to concentrate on asset management and joined J. Stewart Investment in San Francisco as a senior investment analyst and portfolio manager. Within two years, he started his own firm. "At the time, I lived on Alameda, an island in the bay," says Schaff. "I was 28 years old, and I was ignorant of all the rules I should have known. I thought I would sit at the pool with my laptop. I thought I could do a lot of analysis that way, but I forgot the part about relating with clients. My most intelligent move was going back to Chevron, where Gary was still working, and convincing him to retire early. He was a much bigger risk-taker. I had no loyalties at the time. He was the father of two children, and he was doing the early retirement thing for a job that had no income or record of success."

Pollock, however, says if he ever was going to make a change, that was the time. As a result of the Chevron-Gulf merger, Pollock's next job was going to be in Houston, and he wasn't anxious to make the move. So he agreed to join forces with Schaff, and the two initially worked on Bay Isle from their homes.

"We started the firm, and we lived within our means," says Schaff. "If we didn't get the revenue, we didn't spend it. It's amazing how many people don't understand that. We had no marketing campaign. We saved up enough money and said, 'We're here for three years. If, after three years, we haven't figured a way to be successful in the business, we probably shouldn't be in it.'"

Bay Isle's first client was Myron Du Bain, retired chairman and CEO of the Fireman's Fund Corp., a big insurer. Du Bain had been a client of Schaff's former firm. "I was leaving the firm, and Bill decided to leave at the same time I was going. He asked if I was interested in joining him, which I was, and I went with him," recalls Du Bain, who previously served as a director on the boards of many corporations, including Wells Fargo & Co., First Interstate Bank of California and Pacific Telesis Group.

Why would someone with Du Bain's resources and experience go such a young advisor who had little in the way of a track record? "I know enough about investments so that I'm able to evaluate when someone knows more than I do," Du Bain comments. "I can't evaluate stocks as well as he does. It's mainly evaluating the projections, the future of the company. Anyone can look at what's happening today."

Du Bain adds it was obvious to him how bright Schaff was. "He just had a feel for this business. He's very analytical. He can take a company's financial statements and tear them apart and know exactly where they stand," he says. Today, Du Bain still is a Bay Isle client and serves on the board of several nonprofit organizations. Like a wily baseball scout who spotted a superstar when he was a teenager, Du Bain takes pride in the fact that Schaff, whom he calls "a top-flight man," started with just his account and now has a very substantial business. These days, he keeps an office at Bay Isle and buys secretarial services from the firm.

Despite Du Bain's account, it took a couple of years for the firm to grow significantly. Other early clients were friends and colleagues who had worked at Chevron. The corporation offered a good early retirement package in late 1989 and again in 1992, when Bay Isle got 15 to 20 clients from Chevron that year alone, Pollock says. "We specialized in lump-sum rollovers, IRA distributions and retirement packages, that whole area of retirement-oriented investment and planning," he says. "It helped that I had gone through the same paperwork as all of these people."

Early on, Schaff and Pollock concluded that equity management with a style bias toward large-cap value would be an investment area on which they would concentrate. "That doesn't mean we can't buy a growth or small stock, but what we're saying is that large-cap value is what we're best suited at," explains Schaff, who has done models on every company in the Russell 1000.

Feeling confident with his abilities in the large-cap value arena, Schaff started building a strong record of returns in that segment. "We're doing the analysis, and everything is fundamentally done. We use no Street research," notes Schaff.

Bay Isle's large-cap value product has been a key in attracting institutional clients. The firm first got smaller-tax exempt accounts, and in 1995, it landed its first large institutional customer, Daimler Chrysler Corp. The company, for which Schaff manages pension-fund money, still is his largest account.

Over the last few years, the number of Bay Isle's institutional clients have increased dramatically. Institutional clients (including funds) represented 64% of the firm's total assets under management at March 31. Among Bay Isle's institutional clients are Mazda Motor of America, Hitachi Data Systems, Sunkist Growers, Shell Pension Trust, Museum of Contemporary Art in San Diego, Scripps Health, University of San Diego and Ronald McDonald House.

During a decade that favored growth over value, Bay Isle's Large Cap Value composite had achieved a 10-year return at Dec. 31, 2000, of 19.69%, compared with 17.47% for the S&P 500 Index and 17.37% for the Russell 1000 Value Index. Last year, the composite posted an 8.09% gain, versus -9.09% for the S&P and 7.01% for the Russell 1000 Value. At March 31, Schaff was managing $666.1 million in the large-cap value portfolio, and its top five holdings were First Data Corp., 6.6%; McGraw-Hill Cos., 5.2%; Lockheed Martin, 5.2%; Bank of New York Co. Inc., 5%; and Safeway, 4.9%.

When evaluating investments, Schaff considers all of the stocks in the Russell 1000 Value Index, which comprises the 1,000 largest value companies and uses a four-step selection process to reach a fully invested portfolio of 25 to 35 stocks. The process begins with Schaff eliminating any that have a market cap of less than $3 billion, as well as any highly cyclical stocks-such as those of auto, airline, commodity and basic materials, and oil exploration and drilling companies. He then applies his own proprietary modeling for discounted cash flow, asset valuation, sum of the parts and relative multiples.

He also looks at the quality of the company's cash flow and analyzes its balance sheet, as well as considering management's track record and the company's position in its industry. The third step involves screening based on discounts to fair value, catalysts that could drive appreciation and the strength or improvement of the company's sector. In the fourth step, the final selection process, he takes another look at discounts to fair value, financial position, catalysts for appreciation and management's ability to execute its plans. Rules are applied to selling, too-he unloads a holding whenever the current price exceeds a predetermined valuation, management loses focus or significantly deviates from its strategy, the stock exhibits a 15% price depreciation relative to its market segment or it is overweighted within the portfolio.

What have been some of his best large-cap investments? He says his single best call was buying the banks during the S&L crisis. "When many of the financial institutions were selling at below-liquidation value, we were active buyers (in the early '90s). The other major coup was buying Intel early and selling early (we bought it in the low single-digits in the early '90s, post all the splits) and sold in the low 60s at the beginning of 2000 based purely on valuation," Schaff says.

Although Schaff naturally thinks value has a place in equity investing, he believes equity management is not so much about style, but more about discipline and balance. He adds that value could outperform growth for a while. But the outlook for the next five years isn't as clear, and depends on many factors, including how fast the recovery is in the equity markets.

Large-cap value isn't the only area on which Schaff has concentrated. He also saw opportunity in REITs and began selecting some of those investments for clients as well. By the mid-1990s, the REIT market was booming, a condition that was brought on by high yields versus low valuations, he says. He and Pollock also met Ralph Block, who had become an expert in REITs and was thinking of retiring from his career as a corporate and securities lawyer. "I had been writing a newsletter for a few friends who invested in REIT stocks, and one of the people who got the letter was an accountant in San Francisco who knew Gary and Bill from Bay Isle," recalls Block, who has written two books on REITs. "They were very interested in REIT stocks as a substitute for electric utilities in terms of high-yielding investments. They wanted to know when I was going to retire from the law firm so they could hire me."

By 1996, Block was working full time for Bay Isle. The firm also had entered its REIT track record into consultant databases, and one person in particular who noticed was Mark Hurley, CEO of Dallas-based Undiscovered Managers, a money-management firm that offers funds primarily for advisors. He approached Bay Isle about becoming sub-advisor for the Undiscovered Managers REIT Fund, and they signed on at the end of 1997. Block and Schaff are co-managers, with Block responsible for day-to-day oversight.

For the 12 months ended December 31, the fund returned 31.54%, compared with 26.81% for the Morgan Stanley REIT Index. The fund has beaten the index in all of the three years since its inception on January 1, 1998. The fund ranked two out of 92 domestic specialty real estate funds for the three years ended January 31, 2001, according to Morningstar. The fund's top five holdings at March 31 were Spieker Properties, 6.27%; Vornado Realty, 5.99%; Boston Properties Inc., 5.90%; Avalon Bay Communities Inc., 5.58%; and Equity Office Properties Trust, 4.93%.

"The big reason they do such an exceptional job is they really understand the markets, and REITs offer a great opportunity, but not across the segments. You have to be nimble to be able to pick stocks, and you have to keep your asset size to a certain level to be able to do that," Hurley says. The Undiscovered Managers REIT Fund has approximately $78 million in assets.

Technology is another area in which Schaff developed an expertise that eventually led him to manage a mutual fund-Berger Information Technology Fund. His familiarity with electronics dates to his college days, but his focus on tech stocks increased in 1993, when he started writing a column on them for Information Week magazine. He looked mainly at corporate IT-services stocks, and set up the Information Week 100, basically an index of market leaders in that niche. On April 7, 1997, Bay Isle set up a no-load fund, the InformationTech 100 Fund. In July 1999, the fund's board was taken over by the Berger fund board, which changed the name to Berger Information Technology Fund.

Earlier that year, a joint-marketing venture between Bay Isle and Berger was established that allows Berger to market Bay Isle products. All revenue earned by the entity is split 50-50 between the firms. "They market our products because I'm not a good marketer," Schaff says. The arrangement has worked out well and has resulted in many new institutional clients for Bay Isle.

Like many tech funds, Berger's was hurt by the selloff that started last year. The fund was down 28% for 2000 and 41.7% for the first quarter of this year. But strong returns in two previous years-161.3% for 1999 and 62.7% for 1998-have resulted in a three-year average return of 14.08%. The fund's top five holdings at March 31 were First Data Corp., 4.60%; Symantec Corp., 4.20%; IBM, 4%; Check Point Software Technologies Ltd., 3.1%; and Advent Software Inc., 3%. Adding the retail and institutional shares, Schaff is managing about $70 million in the fund.

Despite the recent tech carnage, Schaff doesn't see his approach changing much: He plans to continue focusing on corporate IT shares. "I can never predict what will happen. What I can say is that technology is here to stay. It's patently absurd that technology is not cyclical. Everyone has their day, and everyone has a rainy day," he says.

He adds tech stocks today are still being driven in the short term by a lot of fast money. "Traders and speculators are keeping volatility high, and some of the excesses have yet to be pushed out of the financial markets. I believe technology required for maintaining a competitive cost position and production efficiencies will always be purchased by corporations everywhere. I also believe that technology related to communications will be the last to recover in this cycle. I favor software and services at this point, preferably those that make money and have little debt-and preferably cheap, though the best tech companies are always priced at a premium relative to their peers. These will tend to survive in the long run," he says.

Although Schaff concentrates on financial analysis, investment selection and institutional clients, Pollock's bailiwick is individual clients. He supervises the firm's high-net-worth portfolio-management team and all customer relations. The minimum account size is $500,000, although Pollock occasionally makes exceptions to that rule. He usually meets with all new clients, whom he matches with one of the firm's portfolio managers.

While the firm specializes in large-cap value investments for institutions, it selects a mix of value and growth investments for individuals. "The institutional game is about relative performance, how you are doing relative to a benchmark. You can lose money, as long as it's less than the benchmark," Pollock comments. "On the individual side, it's about absolute performance, what the client has to live on. Each one is different, and we try to figure out an appropriate strategy."

Schaff notes Bay Isle focuses on delivering its own investment products, but in asset classes or styles for which the firm does not think it can add value, it uses either other funds or managers that specialize in those areas to maintain fully diversified portfolios. "I think that this is the best way to differentiate the firm, but also to do the best service for the individual," he says.

Pollock makes sure each client has many points of contact with the firm, including meetings, individual 15-page quarterly reports, questionnaires and newsletters. The firm even has a client party in May at which as many as 300 people have attended.

He adds the company does no overt advertising. Pollock did try a radio commercial once in the early 1990s to see if the firm could target a market, but he found it to be ineffective. Most of the firm's clients have come through referrals. "If you take care of people well, it turns out fairly frequently that they have more assets. If they haven't retired yet, maybe you get to manage their pension plan when they retire. The best customers to market to are the customers you already have," he says.

In addition to intensive research and being sensitive to client needs, Block says, the firm also has set itself apart by the way it treats its own. "We are very, very interested in maintaining a happy set of employees," Block says. "In this industry, there's often a lot of pressure to make money and perform, and sometimes the work environment is not all that good, but we work hard to create a place where people can take the initiative and offer suggestions. There's a tremendous amount of respect for every employee."

Possibly the biggest factor that has made Bay Isle succeed gets back to the feelings the partners have for each other. They see each other not only as co-workers, but also as friends, and Schaff says that chemistry has been an important part of their success.

"Someone once called us a matched pair of bookends. We've never had a serious argument," says Pollock. "Unless we both agree, we don't do it. We've got to feel comfortable. We've both got a lot of mutual respect. He's very bright and talented on the analysis of mutual funds. I'm good at managing, organizing and the people part of it. We complement each other. It's worked."