Stock Buys Not Altered by Terror

Mutual fund managers say that although terrorism continues to cast a pall over the stock market, they are not letting it interfere with their investing decisions.

Some managers interviewed Monday said that they have taken protective steps by adding defense-related stocks such as Lockheed Martin Corp. or energy companies that might benefit from a spike in oil prices, but most said they are sticking to their basic strategies and staying close to fully invested in stocks.

“Benjamin Graham is our guru, not Osama bin Laden,” said manager Nicholas Gerber of the Ameristock and Ameristock Focused Value funds. Graham is the legendary “value” investor who wrote the 1934 book “Security Analysis.”

Jittery investors, however, clearly are worried about terrorism these days, along with the tarnished state of corporate management and accounting and the uncertain pace of economic recovery.

Stocks briefly plunged in Monday’s trading when Atty. Gen. John Ashcroft said a U.S. citizen was arrested last month on charges of plotting to plant a radiation-spreading “dirty bomb.” Major indexes recovered and finished mostly higher for the day, but analysts said fears of new terror strikes kept a lid on gains.

Though there is no historical precedent for the climate of terror in the wake of the Sept. 11 attacks that left more than 3,000 Americans dead, managers say that buying unloved stocks, especially during trying times when share prices are depressed, has been a successful strategy.

Like Gerber, Bill Nygren, who runs the Oakmark and Oakmark Select funds, said he has not changed his approach to finding underappreciated companies.

“If we analyze stocks the right way, we have a competitive edge,” he said. “I don’t think we have an edge on anyone when it comes to guessing about terrorism activity.”

Tom McKissick of the TCW Galileo Large Cap Value fund said he and co-manager John Snider haven’t changed their style.

“We’re in an environment of massive uncertainty. Nuclear attack, biological, chemical--anything seems possible,” McKissick said. “Did that stop us recently from buying shares of the Gap, which we think are undervalued? No.”

Added Carl Domino, manager of Northern Large Cap Value fund: “Other than not being in the stock market, there isn’t all that much we can do. After all, we’re paid to be in the market.”

Still, some managers say terrorism factors into their decision-making, at least to a degree.

“I stay away from stocks that are sure to be adversely affected in the aftermath of another terrorist attack, like the cruise ships and the airlines,” said Jon Burnham, manager of the Burnham fund. Travel-related stocks were slammed when trading resumed after Sept. 11.

Erik Gustafson, who runs the Liberty Growth Stock fund, said that although “you cannot allow the terrorist threat to dominate the investment process, there are certain ways to hedge.”

Gustafson has tried to do that through defense industry stocks, such as Lockheed, which he has built into a major holding. After years of declining military spending, many analysts expect the sector to grow for years as the U.S. builds up its defense capability.

Gustafson also owns consumer staple stocks such as Philip Morris Cos., Procter & Gamble Co. and PepsiCo Inc., which are considered “defensive” in nature because of their perceived steady earnings.

“In a calamity there is no perfectly safe hiding place,” he said, “but these types of stocks have held up relatively well in this environment.”

Domino said he plans to take out “a little bit of an insurance policy” by adding to his energy holdings. If the U.S. invades Iraq or oil supplies are otherwise threatened, prices could surge, analysts say. Domino’s holdings in the sector include ChevronTexaco Corp. and Marathon Oil Corp.

There was little interest in buying gold-mining stocks, the traditional hedge against disaster. The stocks surged this year as tensions rose between rivals India and Pakistan, but have weakened recently.