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Take a hike

In her spare time, she's a practicing Buddhist who backpacks in Tibet every year.

In her spare time, she's a practicing Buddhist who backpacks in Tibet every year.

Gail Seneca can't stop trading. On a recent hike through the Himalayas, the 48-year-old San Francisco-based money manager - a practicing Buddhist who travels to Tibet every year - came upon a yak caravan of local merchants. They were looking to barter some trinkets, and Seneca, who was wearing a pair of inexpensive sunglasses, figured she'd test the market.

"One of the Tibetans looked them over, handed them back to me and said, 'Cheap!'" Seneca recalls with a chuckle. "I thought, Boy, are they tough customers."

It takes one to know one. Like the Tibetan traders she encountered midmountain, the CEO of the $15 billion-in-assets Seneca Capital Management is one shrewd judge of value. In 1999 the growth stock specialist unloaded highfliers like Lucent Technologies and Motorola even as they seemed to be heading for the moon.

"There's no black box here; we sell off when we believe something is overvalued, and these companies were clearly out of bounds," says Seneca, who employs a bottom-up, research-intensive approach, typically keeping just 35 stocks in each equity portfolio. Her flagship fund, a $3.7 billion mid-to-large-cap portfolio, aims to achieve "growth with controlled risk." Typically, two thirds of the stocks are traditional growth names; one third of the portfolio consists of Old Economy bulwarks like consumer goods producers and health care companies.

Seneca will sell if earnings reports disappoint, earnings prospects deteriorate or valuation levels exceed historic parameters. Today her flagship Growth with Controlled Risk fund reports an average price-earnings ratio of 28, versus 32 for the Russell 1000 growth index and 25 for the Standard & Poor's 500 index.

In the case of Lucent, Seneca saw in September 1999 that the company's P/E had reached an all-time high of 70 times earnings. "A sales climate of near perfection was priced into the stock," she says, explaining why she sold Lucent at 65. The stock hit 82 before dropping 90 percent within a year.

Seneca's disciplined approach has helped her to consistently outperform her peers. Though her GWCR fund declined 12.8 percent last year, that compares favorably with a 22.4 percent drop in the Russell 1000 growth index. This year the portfolio is down 15.1 percent through December 14, versus a 21.4 percent decline in the Russell 1000 growth.

On a risk-adjusted basis, her portfolios regularly beat their benchmarks. (Her 0.32 information ratio consistently ranks in top quartile of Zephyr Associates' risk-adjusted performance universe.) From 1990 through September 30, 2001, Seneca's flagship growth portfolio returned an average annual 14.2 percent, versus 11 percent for the Russell 1000 growth and 12.2 percent for the S&P 500. Her midcap portfolio has returned 19.5 percent annualized since its inception in 1991, versus 11.8 percent for the Russell midcap growth index. It's underperforming this year, though, down 26.5 percent through early December, versus a 24.1 percent drop in the Russell index. It was hurt in the fourth quarter by an underweighting in biotechnology stocks. "I insist on seeing current earnings," Seneca says.

Founded in 1989, Seneca Capital, which is two thirds owned by Hartford, Connecticut-based Phoenix Investment Partners, manages $3 billion in large-cap equity, $3.6 billion in midcap equity and $6.4 billion in bonds, with the remainder in small-cap stocks and real estate investment trusts.

After a seemingly unstoppable run in the mid- to late 1990s, most growth managers have stumbled these past two years, and Seneca is no exception. Since the end of 1999, her large-cap fund is down 14 percent on an annualized basis. But investors are drawn to Seneca's penchant for downside protection. From April 2000 through the end of September 2001, Seneca outpaced her benchmark by 11 percentage points. That strong showing largely explains how she pulled in $2 billion in new accounts in 2001, most of them pension funds and foundations, up from $1 billion the previous year.

Seneca's conservative approach to risk means that in bullish times she has trailed her rivals - sometimes considerably. In 1999 Seneca's large-cap portfolio returned 41 percent, while her midcap portfolio returned 51 percent, both besting the S&P 500, which returned 21 percent. But many of her colleagues were up 80 percent, with some growth-stock funds delivering returns as high as 120 percent. "The competition left me in the dust," Seneca admits. "There was no way I could keep up, nor was I going to try."

But vindication came in 2001, when some of her rivals suffered miserably and her strategy became more appealing to plan sponsors. Among her new clients: New York City Retirement Systems, the Directors Guild of America and Florida International University Foundation.

For Seneca, controlling downside risk in a growth portfolio means sticking to specific guidelines: The ratio of P/E multiple to growth rate should be at least 1-to-1; no one industry should ever make up 25 percent or more of a portfolio. Seneca divides her portfolios into two camps: stocks that are forecasted to experience a surprise earnings acceleration and those that are "proven appreciators," with steady, reliable earnings growth.

"This is a very tough time, and she doesn't get rattled," says Philip Greer, a co-founder of Weiss, Peck & Greer and an investment committee member at the $500 million Tulane University endowment, for which Seneca manages large-cap and midcap accounts. Adds Joseph Whitters, CFO of First Health Group Corp., "Seneca is a rare talent."

"The consultants are picking up on the fact that we've clearly demonstrated value," Seneca says. "Oddly enough, this is one of the toughest times to be a growth investor, and yet business has never been better. It comes back to being disciplined."

The middle child of three, Seneca first got a taste for trading from her father, a second-generation Italian immigrant who owned a shoe store in the Bay Ridge section of Brooklyn. He was a day trader before his time.

"There was a small chair and phone line in the back of the store, and my father would trade all day," says Seneca, who helped stock shelves after school and on weekends. "My father showed me how to read Value Line reports."

But her early education wasn't all about money. While attending a Roman Catholic high school in Brooklyn, she often volunteered with nuns in local soup kitchens and for a time thought she might pursue a religious vocation. She spent one summer as a teenager working in San Mateo, a poor Mexican village. "The experience taught me that the human spirit can rise above the most primitive living situations, that people are not defined, and need not be limited, by material conditions."

Seneca studied sociology at New York University, where she earned her bachelor's degree, as well as a Ph.D. in sociology in 1979. She then took a job at the State University of New York at Geneseo, not far from Rochester.

Seneca soon grew bored with teaching and in 1981, at 28, went to work as a vice president in business planning at First Federal Savings & Loan of Rochester. "It was such a break for me, because I had no formal experience in finance," she says.

Two years later, eager for a change, Seneca left First Federal to work as a securities analyst in the asset management division of Lincoln First Bank, a regional commercial bank headquartered in Rochester. It managed roughly $6 billion, mostly for local companies such as Eastman Kodak Co. and Xerox Corp.

Lincoln First's portfolios were managed by small teams; Seneca eventually began to run money in small pension accounts. During this period she often travelled to Wall Street to talk to top analysts, among them research pioneer James Moltz and forecaster Ed Hyman, both of whom were at C.J. Lawrence. "She always asked good questions. You could tell she was a very bright young lady," Moltz recalls.

"Gail was extremely bright and very aggressive but in a way that didn't push the envelope," remembers Robert Wayland-Smith, the former head of Lincoln First's trust administration, who is now retired. "They put her in a role well beyond what she was qualified for." But Seneca learned on the job.

Chase Manhattan Corp. acquired Lincoln First in 1985, and within two years of the merger, Seneca was looking for another job. When a recruiter called about a position at Wells Fargo & Co. in San Francisco, she jumped. "I had always loved San Francisco, and somehow I thought if I was based there, I would wind up doing more traveling to Asia," says Seneca.

When Black Monday struck in October 1987, Seneca had been at Wells Fargo only a few weeks. "I was shocked by the severity of the collapse, but by that time I had come to appreciate the power of interest rates," she says. Seneca had watched them climb all year and failed to act on what in hindsight was a classic signal that the market was about to crack. In the weeks that followed the crash, as the Fed eased and interest rates fell, Seneca recommended boosting the stock weighting of her balanced portfolios from 60 percent to 70 percent.

As a senior vice president at the bank, Seneca ran a portfolio team that managed $30 billion for high-net-worth clients. (She also made several trips to the Far East during her tenure at Wells Fargo.) Seneca's clients included F. Warren Hellman, a descendant of the family that founded Wells Fargo and a former president of Lehman Brothers. An astute judge of asset managers, Hellman saw talent in Seneca.

Hellman repeatedly suggested to Seneca that she should start her own business and offered to provide seed capital. In 1989 Seneca opened her shop in a one-room office on Montgomery Street. "After seeing my father go through hell running the family business, I swore that I'd never start my own company," Seneca says. "But here I was doing just that. It was scary."

Her timing was tough, with markets churned by a recession and the Gulf War. For a strong No. 2, in 1990 Seneca recruited Richard Little, a sell-side analyst who'd been running money at now-defunct Cook-Inlets, a start-up manager.

"It was a gamble, but there was absolutely no doubt in my mind that Gail's very unusual combination of investment, communication and strategic skills could make an investment business work," says Little. Accompanying him was a young analyst, Ron Jacks, just one year out of Arizona State University College of Business.

"Because we were all starting from scratch, we were able to build a disciplined strategy we all were comfortable with. The team's been together even since," Seneca says. Today Seneca Capital has 100 people on the payroll.

Even as she became more and more successful in the financial realm, Seneca found herself increasingly drawn to Buddhism. She had first discovered the faith when she was studying philosophy in college.

"I embraced the Buddhist belief that suffering is a reality in the world," Seneca says, "and once you accept that, you can begin to move on and deal with whatever happens."

Seneca went to Tibet for the first time in 1994, and there she felt transformed. "There's an inherent majesty in those mountains," Seneca says. "In the people, I see a clear focus on what's really important, a humility before the mystery of it all and simplicity. Those three values have permeated my entire life, from my spiritual practice to my investment process."

Seneca suggests that her Buddhism led her to adopt a simple, focused approach to stock picking, and she believes that her centered approach enables her to keep her cool when markets turn ugly. "When you are centered, you focus on what's important. It forces you to follow fundamentals, not the herd."

Slowly, in the early 1990s the firm began to attract high-net-worth accounts, including Hellman's, and then a few institutions came on board. The first arrived in 1990: HealthCare Compare Corp., now Illinois-based First Health Group Corp., gave Seneca a $15 million balanced mandate. Recalls CFO Whitters, "I was impressed with the way she kept her process simple and straightforward."

The Pritzker Foundation signed on in 1991, and in 1993 the University of Miami Endowment came on board. By that year Seneca had pulled in $1 billion, mostly in institutional accounts, which enabled her to appear on the radar screens of the top consulting firms.

By 1996, with $4 billion under management, Seneca felt the need for more capital, both to cash out Hellman and other seed investors and to spread equity to principals. She began looking to partner up with a larger company. In 1997 she found one in Phoenix Investment Partners, the asset management arm of Hartford, Connecticut-based insurer Phoenix Home Life Mutual Insurance Co., now called Phoenix Cos. (The terms of the sale were never disclosed.)

These days, Seneca is focused on positioning her portfolio to take advantage of the economic turnaround that she believes is coming this year.

"An enormous amount of liquidity will lift the market," she says. "But on our way to better times, we can't avoid a deep downturn in jobs. So the portfolio has a foot in both camps."

To benefit from the coming rebound, Seneca has loaded up on technology and capital goods stocks, which make up about a third of her 35-stock portfolio. In mid-September she added to her position in Intel Corp. "It's is in its best competitive position in years," Seneca says. Since she increased her position, Intel stock has jumped from 18 to 32.

To mitigate her risk exposure, Seneca has also picked up recession-resistant stocks like Colgate-Palmolive Co. and Kroger Co., the grocery chain.

Although Seneca thinks volatility will continue to roil the markets, she remains essentially optimistic. "All of the monetary and fiscal resources of this great nation are being harnessed to ensure near-term stabilization and long-term growth. One shouldn't bet against it."