A contrarian story of investing success

By TONIA NOELL MOLINSKI

Essex County Newspapers

MARBLEHEAD _ No pulse races faster than the stock market and Katherine Busboom Magrath, managing director and chief investment officer of ValueQuest/TA, likes it that way.

In what some have called a war between value investing and growth, Magrath steers straight across vast global financial oceans _ and their hazards _ out of an eighteenth century former toy factory in Marblehead.

The beautiful old brick building lies well away from the world's financial centers, hidden up a maze of crooked streets in one of America's most famous seaports.

Magrath sat at ease in her office surrounded by the reports, graphs, charts, and ever-changing computer screens of market data that make her blood race.

In an industry still dominated by men, Magrath stands out, not just for succeeding, but for choosing to sail against the wind. Magrath has always preferred value investing over the seemingly safer growth strategy. This makes her a "contrarian" _ one who finds value in stocks contrary to conventional wisdom _ not an easy thing to do.

In 1999 the company passed the one billion dollar mark in assets.

Despite the market's recent dot-com dip _ which brought the firm's total investments back into the $700 million dollar range _ ValueQuest's international investments have consistently performed better than their international performance benchmarks, Magrath says.

"We have outperformed in our international accounts by at least 400 basis points per annum versus their international benchmarks for nearly a decade," said Magrath. In layman's terms that's four percentage points per year higher than the international benchmark _ a very significant difference if you have $700 million invested.

"This year we're beating the pants off the industry average in the U.S. and in international markets," said Magrath, who brought out the day's figures which showed that through last September 30 ValueQuest's domestic accounts were up 800 basis points over the Standard & Poor's 500 index for the year to date and the international accounts were nearly 500 basis points above Morgan Stanley Capital's international performance benchmarks.

"We're totally techno'd so we can manage money from anywhere in the world," said Magrath. This includes her yawl, Gesina, which is so "wired" that she can conduct business from anywhere in the world.

Her staff finds "that there's more work to be done when I'm away (on her boat), because I have more time to think," said Magrath, smiling at the thought and adding, "I'm tethered to the office no matter where I go." The e-mail connection is critical, as is wireless technology and every single staff member is as wired as Magrath _ whether they're at home or on the road.

In fact it is technology that allows Magrath's firm to do things it couldn't have done 10 years ago.

"There is no such thing as a domestic market _ everything is global," Magrath said, and she credits the success of ValueQuest to its early venture into the global economy.

The contrarian approach is to find stocks _ anywhere in the world market _ that are undervalued. Complex formulas hidden deep in the company's own software identify undervalued stocks based on factors such as products, product history, management, management style, global competition, and outside factors that may have depressed a stock's price.

Magrath identifies her corner of the market as the bottom 20 percent of stock-market performers. It is a tiny niche full of "failures", and sorting the gems hiding there from the true failures is at least partly intuition.

The other human factors are courage and patience.

Going to the bottom 20 percent of the market is not the glamorous side of Wall Street _ but for Magrath glamour is less important than watching a stock she believes in _ that has bottomed out and lanquished in the doldrums _ suddenly catch the wind and sail to its "true value".

The returns are huge.

Magrath attributes her value bias to her midwest upbringing. Both of her parents were teachers and she recalls the strong "value oriented background" of her childhood.

"I always knew I wanted to own my own business," Magrath said, relating a childhood spent selling her toys on the sidewalk.

Originally a fashion major at Washington University in St. Louis, Magrath took her first business and accounting courses as career preparation for a career in fashion.

"That's when I fell in love with finance and accounting," Magrath said.

She switched majors as a junior and in her senior year "I took Graham and Dodd's "Security Analysis" _ a course designed by what many recognized as the top experts in investing.

That's when the wind really hit the sail. She had discovered her passion.

"I went up to the professor and said `I really like this stuff _ where can I get a job doing it?"

This was in the 1960's and women were not yet welcome in the upper reaches of business, but _ after a pause _ the professor said, "Well, St. Louis Union Trust is looking for a man _ but they didn't say they wouldn't look at a woman."

Magrath got the interview, got the job, and became the first woman oil analyst in the country.

She got the job because she went into that interview knowing nearly as much about the trust company as they knew about themselves _ a fact that impressed them because the company was very tightly held at the time and their financial information was not public record.

In 1971 Magrath became the country's first female equity mutual fund manager, managing a $550 million portfolio at Keystone Custodian Funds, and by 1975 Magrath was being actively courted by M.I.T. and Harvard for their exclusive professional programs.

Magrath decided on M.I.T. because she found Harvard's bias toward the case study method too one-sided. She became one of 50 candidates worldwide to participate in the Alfred P. Sloan Fellow program which brought together high level professionals from every industry: finance, health care, technology, manufacturing, and service.

"I never slept more than four hours a night," Magrath said of the year-long business program.

During her stint at M.I.T. Magrath met CEOs from every major U.S. industry, and traveled to Asia and Europe to meet high level executives there.

"It wasn't about how to do business," Magrath said. The Sloan program was designed to prepare an elite group of upcoming promising professionals for the future at a time when today's changes were just pinpoints on the horizon.

Several of the M.I.T. Fellows and Magrath still vacation together. They are now at the head of their industries. They are defining the future _ no longer just talking about it.

Magrath moved to the United Brands Company where she was director of equity management. By 1979 she was managing $1.5 billion in equity as chief investment officer at the Ford foundation.

In her own firm, Magrath is more aggressively value oriented than before _ "but I've always been value oriented," she said.

"The things we're looking at are very controversial." Magrath pointed to some data printouts on recently weakened stocks like Kodak, Xerox and Polaroid _ companies that have suddenly appeared on her horizon _ another symptom of the market wars.

"These kinds of [Fortune 500] companies would never normally get near our radar screen," said Magrath as she pulls up several other screens on her terminal. She tracks the line graphing performance and shakes her head. The stock doesn't meet her value requirements yet.

"Global is all the fad in the last two years." Magrath said as she turned back to the papers on her desk. "We've been doing it for 16 years."

The average experience of her team is 20 years. "We vet every stock as a group," said Magrath, pointing out the talents of her staff. "They're here because they want to be part of a small shop." She said.

The distance from Wall Street is an advantage. There is a sense of life beyond the computer terminal in spite of being wired to the world. And the size of her shop makes ValueQuest more maneuverable.

"We can act faster," said Magrath.

And she has a lot of fans, notable among them Peter S. Lynch, vice chairman of Fidelity Management & Research in Boston, who says, "Katherine's an outstanding investor, very bright, very creative, very diligent, very flexible and a real winner. I've known her for 30 years.

She was running a fund before I was running the Magellon Fund and she's a great person.

"She's a neighbor and friend. She's developed and created a very successful company _ it's a team that functions well. Katherine and the rest of the team at VQ are a rare combination."