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.