Diane Jaffee doesn't run yellow lights. An analyst and money manager for more than two decades, Jaffee has witnessed too many stock blowups to be bold.
"I've seen other managers make missteps, and I've made a few of my own," she says. "So I try to capture the rewards of investing in stocks but also try to soften the downsides."
Jaffee's go-slow strategy doesn't mean that the funds she manages are short on performance. TCW Galileo Dividend Focused (symbol TGIGX, 800-386-3829) whipped Standard & Poor's 500-stock index over the past five years, returning an annualized 10 percent to Aug. 2, compared to negative 2 percent for the index. And it returned an annualized 13 percent over the past 10 years — versus 11 percent for the S&P — putting it among the top 10 percent of funds that specialize in undervalued large-company stocks for that period.
Another fund that Jaffee manages, TCW Galileo Opportunity (TGOIX), doesn't have as good a record in its class — over five years, it ranks in the top 30 percent among funds that specialize in undervalued stocks of small companies. But Opportunity has the advantage of being one of the few no-loads of its type that isn't bloated with assets and is still open to new investors. The fund gained an annualized 14 percent over the past five years, versus 12 percent for the Russell 2000 Value index. Jaffee, 44, has managed both Dividend and Opportunity since 1995.
Jaffee and her six analysts look for stocks that are cheap by traditional measures, such as price-earnings ratio. Then comes the real work. They study financial statements and interview company officers, clients, suppliers and rivals. The seven each visit an average of one company every couple of weeks.
"You learn so much by visiting onsite," Jaffee says.
Jaffee also likes stocks that have been ignored.
"We look into this pool of firms where everybody just says 'yuck.' If we can find one or two where management is cutting costs or increasing sales, that is a good day for us."
But Jaffee doesn't jump into the pool — she sticks in a toe. That is, she puts only 0.25 percent of a fund's assets in a new stock.
"Even though the research we do up front is good, you find out a lot of things once you own the car." Only when a company starts growing as expected does she increase the stake — but rarely to more than 2 percent.