THE STRONG MAN BEHIND THE STRONG FUNDS DICK STRONG MADE HIS REPUTATION AS A MARKET-TIMING GENIUS. BUT HE WANTS TO BE REMEMBERED AS THE MAN WHO BUILT HIS COMPANY INTO THE NEXT FIDELITY.
(FORTUNE Magazine) – Happy birthday to yoooou." Dick Strong is bellowing into the car phone of his pale-gold Lexus LS400 as he drives a pair of passengers through the lush Wisconsin countryside. The object of his crooning, his wife of 31 years, hasn't answered the phone, but--what the heck--he'll just sing into the answering machine. "Happy birthday to yoooou." Actually it's not even her birthday, but--what the heck--Dick will pretend it is. "Happy biiiiirthdaaay, dear Baby Doll"--he motions his passengers to join in his little prank--"Happy birthday to yoooou." As Strong hangs up the phone, he explodes into laughter.
Why is this man singing? Simple. Even discounting his innate, almost overbearing optimism, Dick Strong, founder, chairman, and guiding light of Strong Capital Management, is on a roll. He's in the midst of a spate of hiring in which he has assembled--under his own brand name--a team of the hottest money management talent in virtually every key stock market sector. Just a week earlier, in fact, Strong had made himself the envy of the fund industry by picking off Mary Lisanti from Bankers Trust to run Strong Small Cap. And such older funds as Strong Common Stock and Strong Opportunity have finished in the top quintile of their peer group over the five years ended August 31. Says mutual fund adviser Michael Stolper: "Of all the fund companies out there, only Fidelity and T. Rowe can offer a similar breadth of superior performance."
Strong would love that comparison to Fidelity. He says, with considerable bravado, that he would like to transform his firm into only a slightly smaller version of the country's largest mutual fund retailer: "I want to build a great financial institution." He rallies the troops at companywide meetings with the refrain "No. 2 in 2002." Never mind that, at No. 34, the firm has a long way to go. Since 1986, when Strong and fewer than 100 staffers moved into a lavish 165,000-square-foot headquarters he built in the Milwaukee suburb of Menomonee Falls, Strong has been expanding like crazy. His offer to highflying money managers is simple: Put up great numbers and you will gain the license--and the resources--to do as you want. Donna Strong, the wife whose birthday it wasn't, pitches in by talking up Milwaukee and advising prospective recruits on the best schools for their children.
No one doubts that Strong Capital's growth--800 people now work there--is a product of Dick Strong's vision and perseverance. That in itself is the greatest lure for new talent, although compensation counts too. Key people like Lisanti get ownership stakes in the firm, which is probably worth $860 million using the rule of thumb that values a fund company at 4% of the total assets under management. Equity is one benefit many of Strong's rivals--like Fidelity or Vanguard--can't or won't offer their managers.
Ask Strong, 54, to ponder his success, and he serves up one of his classic Boy Scout answers: "Only in America," he says. "Only in America." Yet who's to argue? His life really does read like a page out of Reader's Digest. Raised in Wahpeton, North Dakota, Strong was orphaned at 17 when his father, a county farm agent, collapsed from a heart attack and his mother died of leukemia six months later. Young Dick moved in with the family of a classmate but spent much of his time in the high school basketball gym. Strong says it was his coach, Wes Windmiller, who instilled the rah-rah competitiveness that so characterizes him today.
Lanky at 6 foot 3 inches, Strong played basketball at Baldwin-Wallace College. After graduation he thought briefly about coaching. Instead, he attended law school for one semester, and finally found himself when he enrolled in business school at the University of Wisconsin at Madison. There, like a coterie of other high-profile fund managers--including Albert Nicholas of Nicholas Co. and William Nasgovitz of the Heartland funds--Strong received his baptism in the world of stockpicking.
He had the right training but the wrong personality--at least for his early jobs. Three of the first four, including stints as an analyst at Employers Insurance of Wausau and Robert W. Baird & Co., ended in his dismissal. "I'm impossible," concedes Strong. "My intensity is hard to keep up with." Most famously, a money management partnership with Albert Nicholas fell apart in 1973 over what Strong admits were his uncompromising market opinions. Are they still friends? "Sort of," Strong says over breakfast at the local Denny's, with the kind of elliptical response he is wont to use when discussing something he'd rather not. Sort of? Strong takes a swig of decaf, uses his fork to push some Eggbeaters around his plate, and grimaces. "I'm friends with him, but he's not friends with me." The two, in fact, haven't spoken since the split.
Given Strong's iconoclastic, swing-for-the-fences investment style, it's easy to see how he'd be miserable having his market moves vetted or, worse, second-guessed. On the one hand, he visits five to ten companies a week, paying particular attention to the chief executive's work habits, strategic insights, and an illusive trait Strong calls personal mettle. He is, for example, likely to be suspicious of CEOs with deep tans. But it is Strong's calls as a market timer that have earned him his reputation. In 1974, while other money managers were building equity positions following 1973's selloff, Strong launched his company with a 100% cash position, thus sidestepping the most disastrous part of the two-year-long bear market. In the late 1970s and early 1980s, he was sitting on a portfolio of energy stocks as the oil crisis reached its crescendo. And with inflation running at 9% in 1981, Strong invested 97% of his portfolio in commercial paper and daintily skipped past a downturn that lasted 20 months. But of all Strong's prescient bets, the one rivals envy most was his decision to unload 60% his equity position in September 1987, sparing clients from the worst of the 26% selloff on Black Monday, October 19. Says Strong, with no trace of modesty: "I managed to hit every lily on the pond for years."
By the end of the 1980s, Strong was personally running eight of his company's 11 stock and bond funds. Altogether he was managing $2.2 billion, not counting private accounts. He also oversaw everything from marketing to technology. He had big plans for expansion--but he was stretched as thin, and taut, as a wire.
Then came the collapse of the UAL buyout and the spectacular junk-bond implosion that followed. In six months, from August 1989 through February 1990, Strong's flagship fund at the time--Total Return--lost 18% of its value. The press, notably the Wall Street Journal, shredded him. Perhaps worst of all for a man who cherishes his white-hat image, the Securities and Exchange Commission began an investigation into a series of in-house trades among his mutual funds and pension clients that culminated in the parent company's reimbursing $440,000 to certain funds. Says Strong, a man who claims to go for a year at a time without cursing: "It was absolute...heck."
As brushes with disaster so often do, this one concentrated Strong's mind and cleared the way for his grand second act. Working day and night for a year, he combed through his portfolios, selling losers and capping his junk-bond exposure. He began the arduous process of recruiting professionals to run the marketing and administrative sides of his business. And he gradually surrendered money management decisions to the best professionals he could find. Strong often interviews 50 applicants for a single spot. But once he draws a bead on a manager, it's hard to shake him. He handed over fixed-income funds to Brad Tank. Steve Harrop took on the thriving money market fund operation. Today, aside from running the company's hedge funds, Dick Strong co-manages just one portfolio: Discovery.
To a remarkable degree, Strong has built his company to reflect the lessons learned from his own experience, as if he were seeking to create the kind of firm that didn't exist when he bounced from job to job. He has struck upon a happy combination of pay, freedom, resources, and plain goodwill that a clutch of the best fund managers have found irresistible.
That esprit de Strong helped lure Richard Weiss, co-manager of the Opportunity and Common Stock funds. When Dick Strong first approached him at Stein Roe & Farnham in Chicago, Weiss had been trying to create interest in a new small-cap fund that would let him use his skills tracking underfollowed companies; no dice. After 11 months of negotiations with Strong, Weiss came aboard with an explicit promise that he could run the Common Stock fund as he saw fit. "I took over on a Tuesday, and within 24 hours I had sold everything in the portfolio," recalls Weiss. "Then I took a week's vacation." Dick Strong's response? "He didn't say a word," says Weiss. "It was as if to prove to me that he understood and supported my entrepreneurial impulse." The Common Stock fund has finished in the top 5% of its peer funds over the past five years. And Opportunity has finished in the top 19%.
Strong's headquarters feel so different from the digs of Boston, New York, or San Francisco money managers that a visitor can scarcely believe all are in the same business. Take the offices, or rather the lack thereof. Everybody from marketers to analysts to Strong himself sits at open work stations; private rooms can be reserved for lunch or talks with clients. Then there's Strong's habit, as he galumphs around the building, of greeting virtually everyone by his or her first name. "I know very few last names," he says. While she was considering her job offer from Strong, Mary Lisanti visited headquarters one Saturday and listened as Strong discussed the merits of crew cuts with a security guard. "He makes people feel special about being there," she says. "It's important to me what kind of place I work in." Strong's focus on his firm's corporate culture borders on the obsessive. He piles on four company outings a year--from Fall Kickoff at the end of September to July's Great Circus Picnic--to keep employees engaged. And maybe give vent to his own exhibitionist streak.
The Midwestern feel at the prairie-style headquarters is anything but skin deep. Strong has turned the company's heartland roots to maximum advantage. Ronald Ognar, 53, an Illinois native who built an enviable growth stock record at RCM Capital Management in San Francisco, missed Big Ten football. So when Strong offered him the chance to run Strong Growth, he took it. Says Ognar: "We Midwesterners are different from people on the coasts." Strong, who once worked on a dairy farm, admits a bias to farm boys. "Farmers are entrepreneurs," he says. "They've got to have a heck of a work ethic, and they need to master a lot of different disciplines. They also need to know how to fix everything from combines to computers." Chip Paquelet, 31, raised on a farm in Ohio, co-manages the Discovery fund with Strong. Another farm boy is trader Peter Meissner, 30. Says Strong: "It took me ten minutes to decide to hire him, and everybody thought I was crazy. Now they all want him on their team."
Not all roads lead to Milwaukee. Three of Strong's boldest hires--in particular those designed to fill his need for value-oriented mutual funds--are based in the New York City area and have no intention of moving--at least not to Wisconsin. Laura Sloate, 51, says she first talked to Strong 27 years ago when he called to ask her about a research report she had written on a mobile home retailer. The two hit it off famously and chatted regularly for years. It wasn't until Sloate asked to bring her dog to their first meeting that Strong realized she was blind; she had lost her sight at age 6 from juvenile glaucoma.
Sloate's modus operandi is unusual. She scours newspapers, journals, and magazines to uncover the shifting business trends and management changes likely to portend a move in a stock. Graduate students read and record the periodicals for her, and a scanner converts brokerage and annual reports into text that she can hear on a computer. The titles on her reading list include everything from Home Center News to the Financial Times. Sloate doesn't work explicitly for Strong. But her firm, Sloate Weisman Murray & Co., which manages money for institutions and individuals, began running a new fund, Strong Value, in December. Sloate brings to Strong annual returns averaging 22.2% over nearly nine years, vs. 15.7% for the S&P 500 over the same period. Strong will give her the marketing clout to build up Strong Value's assets. Not given to exuberant compliments, Sloate says, entirely without irony: "Dick really does have the vision thing."
Another New York value player signing on with Strong is David Schafer, 57, manager of Strong Schafer Value fund. Schafer has been a paraplegic since 19, when he flipped over the Chevrolet Impala he was driving. He's fond of telling visitors how he turned the handicap to his advantage by haunting the bars of Manhattan's Upper East Side and arm-wrestling unsuspecting customers for the month's rent. Schafer, who became a committed value investor during the bear market of 1973 and 1974, remembers seeing Avon Products stock fall from $140 a share to $18.63. "It was pretty much the same company at either price," he says. Today he searches for stocks with low price-to-earnings ratios and superior growth prospects, and keeps turnover so minimal (under 30%) that he doesn't even have a full-time trader. He says he allied himself with Strong because "I didn't have the knowledge, or the inclination, to market my fund." His assets have doubled to $380 million since he began using the Strong name in February.
Several years earlier, Strong had put the moves on William Reaves, a guy who loves utilities. It used to be that utilities were the province of cautious, older, patient investors. Some people might call Reaves old at 74, but he is hardly patient or cautious. "Patient?" he laughs. "Hell, I'm going to kill something." Reaves manages Strong American Utilities from his Jersey City offices overlooking the Hudson River. With a three-year return of 10.6%, he has bested the average utility fund by over four percentage points. Of course, his is no ordinary utilities fund, since Reaves makes bets as large as 10% of the fund's assets on a single stock. He also dips into oil and racy telecom companies. Reaves's handle on the ever-changing regulatory environment and his ability to home in on companies that raise dividends clearly pay off. The fund's yield of 3.1% will serve Strong investors well in a bear market. "You know," says Reaves, "you need a little fear in the market for utilities to get any respect."
Sitting in the gilded Palm Court of New York City's Plaza hotel, Dick Strong looks a mite uncomfortable as he drinks iced tea. He's discussing the disappointing performance of his Discovery fund, which has returned 9.9% annually over the past three years, 4.6 points below the average for aggressive growth funds, according to Morningstar. Year to date, Discovery has lost 3%, a poor enough performance to land it in the bottom quartile among its peers. Part of the problem was Strong's misguided move into bonds at the beginning of this year--the same shift that helped lay low former Fidelity Magellan manager Jeffrey Vinik. Strong compounded his mistake with a 25% short position on the S&P 500. Then, in March and April, he reversed course, piling back into many of the technology stocks that bore the brunt of July's selloff.
The question is not whether Strong will claw his way out of the cellar--he has shown time and again that he can--but whether market timing is still a viable investment style. Today's investors, especially those salting money away in 401(k)s, demand a predictability that has never been Strong's forte. He seems to have gotten the message. He says Discovery's brave bets on the direction of the market are over; its portfolio will now be evenly spread among large, medium, and small stocks, although Strong and Paquelet say they will be able to put up to 25% in cash if they think a correction is imminent.
Discovery, then, is changing with a new era, much like Strong himself. The one-time market gunslinger has metamorphosed into a company builder. There will likely be more funds--index and sector funds are naturals--and new office space on the prairie. But first things first. "For now it's the execution that counts," says Strong--sounding just like a basketball coach.
REPORTER ASSOCIATE Eileen P. Gunn