Aggressive Fund’s New Manager Had Big Shoes to Fill

Henry Alarcon had a couple of tough acts to follow when he took over the Pacific Horizon Aggressive Growth stock mutual fund in April. But so far, Alarcon is keeping the fund’s hot track record intact.

The $100-million fund, based in San Diego, ranked 43rd out of 1,776 funds in year-to-date performance as of mid-July, with a 16.3% gain, according to Lipper Analytical Services. The average stock fund was up just 4.7%.

Over the past five years, the Pacific Horizon fund has gained 131.7%, versus 86.8% for the average fund.

Alarcon is the third manager to run the aggressive growth fund, which is operated by Security Pacific Corp.’s Pacific Century Advisers. The first manager was Art Nicholas, a legendary stock picker who now runs Nicholas Applegate Capital Management in San Diego. William Duncan succeeded Nicholas in 1984, and he too was a hot hand. In April, Duncan left to form a new investment firm, Duncan Hurst, in La Jolla.

Alarcon, 39, had been running a small investment firm in Los Angeles when he was tapped for the aggressive-growth fund job.

The new manager says the adjective “aggressive” will continue to define how the fund invests. “We try to take a very strong bottoms-up approach to stock picking,” Alarcon said. “We want to own the strongest stocks in the strongest (industry) groups.”

That point of view led Alarcon to begin a shift out of many small computer stocks in June, when the stocks appeared to be weakening after a wild first-half run. “So we were able to avoid a lot of the disasters,” he notes, as computer stocks were trashed in early July on worries about earnings.

Meanwhile, Alarcon in June saw momentum gaining in biotech stocks and in oil-services stocks, so he invested heavily in those areas. He was right again: Both groups have been red-hot lately, though profit taking has knocked some of the biotech stocks back in recent days.

Alarcon says he tries to have an 18-month horizon when he buys a stock. But he admits that he has been part of the institutional-investor pack that has dumped stocks mercilessly of late, when companies have failed to deliver on quarterly earnings. “If the earnings aren’t there, and I feel the company can’t make money at the level I need to have, I’ll just blow it out,” he said.

At the same time, he says he is content to stay with biotech stocks now, while other investors have been cutting back. “They still look attractive to me,” Alarcon says of his biotech stocks, including Amgen Inc., Genzyme Inc. and Genetics Institute. Alarcon bought Amgen at prices ranging from $58 to $76 a share. The price now: $86.25.

In oil services, Alarcon owns such names as Baker Hughes, Halliburton and Smith International. The group rallied anew Tuesday, as investors continued to bet on rising oil prices. Baker Hughes rose 50 cents to a new 52-week high of $31.50. Halliburton jumped $1.625 to $54.875.

The Pacific Horizon Aggressive Growth fund’s minimum investment is $1,000, and the fund charges a 4.5% sales “load,” or up-front fee.

Utility Power Surge: Utility stocks have roared to life after slumping since December. The question now is whether the surge can last--and whether it’s a bad omen for the broad market.

The Dow Jones utility average jumped 1.8% Monday, and another 1.4% Tuesday, while most other stock indexes have sagged or remained flat. Consolidated Edison of New York has led the charge, up 8.7%, to $25 from $23, since Friday. Most other electric and gas utilities have been part of the rally, to varying degrees.

Historically, utility stocks have been hostage to interest rate trends. When rates rose, utility stocks fell; when rates fell, utilities jumped. The sensitivity to rates stemmed partly from utilities’ function as income stocks for conservative shareholders: If bond yields rise, utility stocks’ dividend yields of 6% to 8% look less attractive.

Utilities also have been sensitive to rates because they traditionally were big borrowers.

So does the utility rally indicate that investors are confident that interest rates are headed lower? Maybe. But Gary Hovis, analyst at Argus Research in New York, cautions that the early utility buyers “are in this just for trading purposes,” not because they believe in any long-term trend yet.

What’s more, though utilities signaled the end of the bear market in 1974 (and subsequent fall in interest rates), they could be signaling something else now--a flight to safety. If interest rates are dropping because a recession is under way, utilities may be the only safe stocks left.

AGGRESSIVE STOCK PICKING

Here are the biggest holdings in the Pacific Horizon Aggressive Growth stock fund, one of the best-performing funds this year--up 16.3% through mid-July.

% of 52-week Tues. Stock portfolio high/low Close Conner Peripherals 3.9% $31-$10 5/8 $26 3/4 Amgen 3.7% 92-37 1/2 86 1/4 Medical Care Intl. 3.5% 41 1/4-18 1/8 38 1/4 Baker Hughes 3.4% 31 1/2-19 3/8 31 1/2 Genzyme 3.4% 22 1/2-9 3/4 18 3/4 Silicon Graphics 3.4% 40 7/8-18 1/4 34 5/8 Costco Wholesale 3.3% 48 1/8-24 1/2 43 1/4 Merry-Go-Round 3.0% 28-9 3/4 20 5/8 Smith International 2.5% 17-11 16 5/8 Scitex Ltd. 2.5% 42 1/4-10 5/8 37 3/4

Source: Pacific Century Advisers