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Dear Shareholder:
The greatest speculative
bubble in American financial history deflated a little more last quarter.
Technology stocks, which have become a financial religion, showed small signs of
heresy in the face of profit disappointments. By contrast, the stocks of good
but less theologically favored companies advanced:
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3rd Qtr. |
Year-to-Date |
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Nasdaq Composite |
-7.4% |
-9.7% |
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Dow Jones Industrial Average |
2.4% |
-6.3% |
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S&P 500 |
-1.0% |
-1.4% |
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Morningstar Large Value Funds Index |
4.1% |
2.8% |
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Your Portfolio |
16.2% |
18.9% |
Do the Right Thing
Doing the
right thing is harder than knowing the right thing to do. In this era of
"irrational exuberance," the obviously right thing to do to preserve capital is
to avoid the exuberantly valued stocks, notably many technology issues still
selling at prices which are remarkable by any standard except that of the last
two years.
Actually doing that is more
difficult than it seems. Avoiding those stocks last year meant missing large
speculative gains. The psychological pain of feeling left behind in such a
euphoric market should not be underestimated. Neither should the impact of
client criticism (e.g. "Why don't you spice up your portfolio with some exciting
tech stocks?"). With no small amount of frustration on our part, we have
remained rational and patient (or, less charitably, stubborn and clueless) value
investors. Our ability to remain rational and patient is aided significantly by
the patience and understanding of our clients. We would like to thank you again
for your support last year when we appeared totally benighted because we would
not pay astounding prices for stocks we (and most other investors) simply could
not understand.
eToys is a good example. Last
year it soared from an IPO price of $20 to $86. It has one of the more appealing
business models in the business-to-consumer arena. It also has modest sales,
large losses, and a share price which recently sank to $5. Can they grow the
business into profitability? Is it cheap after such a dramatic decline? No one
really knows. We do know the company is burning cash, a precious asset which
will be gone in about a year at the current rate. We also know the stock still
sells at a significant premium to its rapidly evaporating book value, so there
is no asset protection. We are willing to buy out-of-favor stocks which are both
understandable and clearly cheap. Currently eToys is neither.
"It Will Fluctuate"
is the response Bernard Baruch gave when asked
what the stock market will do. That reply, while probably unsatisfying to the
listener at the time, is unusually relevant today. The modest change in the
year-to-date stock market indices masks unusually large fluctuations in
individual stocks. In many cases the volatility comes from momentum investors
who rush from one hot stock to another. Since underlying business values rarely
change as rapidly as the prices investors attach to them, this volatility
creates a natural opportunity for a value investor such as ourselves to be on
the other side of the trade with a momentum investor. Some recent examples
include:
We purchased Allstate and Nike at significant discounts to their intrinsic values earlier this year, then sold them a few months later as their stocks appreciated to our estimates of fair value.
We bought more Freddie Mac earlier this year when investors pushed its share price down. Recently we reduced our large holdings in Fannie Mae and Freddie Mac in response to a moderate rise in their political risk combined with a generous increase in their share prices. We still believe they are good businesses worth holding, but in smaller amounts to reflect the change in their risk/reward profiles.
Philip Morris, the most controversial stock in your portfolio, now is a smaller position as a consequence of a 50% increase in price off its recent lows. In this as in other stocks, we adjust the size of the position to reflect the changing cheapness of the stock.
We added some new positions to your portfolio. Retailing stocks are out of favor, which gave us the opportunity to buy Target. McDonald's is an old friend we purchased again on recent price weakness.
This surge in trading does not mean we have become converts to the ethos of day trading. Our preference is to buy and hold for an extended period, but the locus of value opportunities is more important than our preference. While our professional mission is to enrich our clients rather than our brokers, we will continue to trade more actively than usual so long as large fluctuations in stock prices pay us well to do so.
Boredom Revisited
In the realm of boredom, as in other aspects of
life, it is better to give than to receive. Real estate investment trusts
(REITs) are an exception. If last year's pinnacle of excitement was a small
technology stock without earnings, then the depth of dullness was a REIT with an
understandable business, great balance sheet, generous yield, and a price well
below the private market value of its properties. Since we made them the major
new position in your portfolio last year, REITs have demonstrated improving
fundamentals and declining yields (for the high-grade reason that their stock
prices are up). They are still boring, but that is the kind of boredom we can
live with very well.
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Sincerely, |
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/s/ |
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James Gipson |
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Chairman & President |
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October 2, 2000 |
The Fund's compounded annual total return for the one, three, five, seven and ten year periods ending September 30, 2000 and for the period since inception (February 29, 1984) was 17.3%, 13.6%, 18.2%, 18.2%, 19.3% and 16.8%, respectively. These returns assume redemption at the end of each period. Past performance is no guarantee of future results. For comparison purposes, the Nasdaq Composite
Index, which is market-value weighted, measures all Nasdaq domestic and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 and DJIA indicies are unmanaged indicies of 500 and 30 companies, respectively, that are widely recognized as representative of the equity market in general. The Morningstar Large Value Funds Index is an index of 706 managed large value mutual funds monitored by Morningstar.(UNAUDITED)
Investment Portfolio
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Market | |
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Shares |
Cost |
Value |
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COMMON STOCKS (72.5%) |
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AEROSPACE & DEFENSE (4.6%) |
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Lockheed Martin Corporation |
802,400 |
$16,027,913 |
$26,447,104 |
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Litton Industries, Inc.* |
387,800 |
13,097,705 |
17,329,813 |
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29,125,618 |
43,776,917 |
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COMPUTER SERVICES (1.9%) |
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Electronic Data Systems Corporation |
426,800 |
16,876,914 |
17,712,200 |
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FOOD & TOBACCO (14.4%) |
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Philip Morris Companies Inc. |
1,991,700 |
64,584,012 |
58,630,669 |
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Sara Lee Corporation |
1,321,000 |
22,055,729 |
26,832,813 |
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UST Inc. |
1,072,200 |
29,529,265 |
24,526,575 |
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McDonald's Corporation |
700,900 |
20,546,035 |
21,158,419 |
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Other |
591,100 |
5,537,918 |
5,911,000 |
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142,252,959 |
137,059,476 |
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HEALTH CARE (5.5%) |
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Tenet Healthcare Corporation* |
957,800 |
15,993,360 |
34,839,975 |
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HCA - The Healthcare Company |
235,600 |
4,015,692 |
8,746,650 |
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Hillenbrand Industries, Inc. |
195,000 |
5,294,014 |
8,726,250 |
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25,303,066 |
52,312,875 |
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INSURANCE (1.7%) |
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Old Republic International Corporation |
656,040 |
7,910,125 |
15,785,963 |
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MORTGAGE FINANCE (17.8%) |
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Freddie Mac |
1,845,300 |
67,303,292 |
99,761,531 |
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Fannie Mae |
671,400 |
41,710,835 |
48,005,100 |
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Golden West Financial Corporation |
385,500 |
11,115,083 |
20,672,438 |
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120,129,210 |
168,439,069 |
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REAL ESTATE INVESTMENTS (11.4%) |
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Equity Residential Properties Trust |
657,300 |
27,204,414 |
31,550,400 |
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Equity Office Properties Trust |
762,400 |
18,727,495 |
23,682,050 |
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Archstone Communities Trust |
727,100 |
15,020,261 |
17,859,393 |
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Mack-Cali Realty Corporation |
459,600 |
11,629,737 |
12,954,975 |
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Apartment Investment & Management Co. |
210,600 |
7,891,206 |
9,700,763 |
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Security Capital Group Inc./Class B* |
380,800 |
5,553,647 |
7,211,400 |
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General Growth Properties, Inc. |
151,300 |
4,619,051 |
4,869,969 |
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90,645,811 |
107,828,950 |
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SPECIAL SITUATIONS (15.2%) |
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R. R. Donnelley & Sons Company |
1,078,600 |
$ 23,838,613 |
$ 26,493,113 |
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Manpower Inc. |
690,000 |
16,988,537 |
22,036,875 |
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De Beers Consolidated Mines, LTD |
663,200 |
9,429,476 |
18,362,350 |
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The Stanley Works |
638,800 |
16,797,029 |
14,732,325 |
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Target Corporation |
533,700 |
13,380,725 |
13,676,063 |
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Sigma-Aldrich Corporation |
254,000 |
6,853,866 |
8,382,000 |
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H&R Block, Inc. |
219,700 |
7,041,780 |
8,142,631 |
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Airgas, Inc.* |
916,700 |
11,683,434 |
6,245,019 |
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Armstrong Holdings, Inc. |
380,200 |
8,578,638 |
4,538,638 |
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Great Lakes Chemical Corporation |
74,900 |
2,881,226 |
2,195,506 |
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Other** |
1,456,100 |
18,440,234 |
20,317,953 |
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135,913,558 |
145,122,473 |
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TOTAL COMMON STOCKS |
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568,157,261 |
688,037,923 |
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BONDS (13.0%) |
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SHORT TERM NOTES (13.0%) |
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Federal Home Loan Bank Agency Notes |
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5.500%, due 8/13/01 |
109,345,000 |
109,020,628 |
108,388,231 |
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Federal Home Loan Bank Agency Notes |
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5.865%, due 6/29/01 |
15,180,000 |
15,177,797 |
15,096,965 |
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124,198,425 |
123,485,196 |
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TOTAL INVESTMENT SECURITIES (85.5%) |
692,355,686 |
811,523,119 |
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SHORT TERM INVESTMENTS (13.4%) |
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REPURCHASE AGREEMENTS (13.4%) |
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State Street Bank and Trust Co., 4.75%, |
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due 10/02/00, collateralized by U.S. Treasury Obligations , |
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due 03/31/01, 04/30/01 and 08/31/01 valued at $129,324,943, |
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expected proceeds, including interest, of $129,375,124 |
126,774,000 |
126,774,000 |
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TOTAL INVESTMENT PORTFOLIO (98.9%) |
$ 819,129,686 |
938,297,119 | ||
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Cash and Receivables less Liabilities (1.1%) |
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10,476,173 | ||
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NET ASSETS (100.0%) |
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$ 948,773,292 | ||
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========== | ||
*Non-income producing securities.
**Includes income &
non-income producing securities.
CLIPPER FUND
INVESTMENT ADVISER
DIRECTORS
TRANSFER & DIVIDEND PAYING AGENT
Overnight Address:
330 W. 9th Street,
CUSTODIAN
COUNSEL
INDEPENDENT AUDITORS
This report is not authorized for distribution to prospective investors unless accompanied by a current prospectus.
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