Q: Are my shares of Wachovia Corp. going to do well? Will they increase as it grows? -- R.D., via the Internet
A: The nation's fourth-largest bank in terms of assets has a driving ambition to become bigger.
What's uncertain is whether it might suffer financial consequences by overdoing it, and whether it can improve operational efficiency as it expands into new regions and business lines.
There's concern over its latest acquisition, the $23.9 billion takeover of the Golden West Financial Corp. savings and loan firm. This brings combined assets to about $700 billion, with more than 105,000 employees and about 3,400 branches. It acquired the regional banking firm SouthTrust Corp. just two years ago.
Some analysts fret over the fierce competition and market uncertainties it inherited with Golden West's mortgage and high-interest savings businesses.
There's also the possibility this Southeast and mid-Atlantic powerhouse might spend extravagantly to add to its new Western holdings, though Chairman and Chief Executive G. Kennedy Thompson said he expects no significant merger for another two years.
The bank has launched a $150 billion community-development plan in California over the next decade.
Shares of Wachovia (WB) are up 4 percent this year after scant gains last year and advances of 13 percent in 2004 and 28 percent in 2003. In August, the company announced it was increasing the quarterly dividend by 10 percent, to 56 cents a share. Its acquisition of the automobile lender Westcorp has recently been a positive for overall earnings.
Last week, though, its quarterly results and fourth-quarter forecast disappointed Wall Street.
Consensus analyst recommendation on Wachovia shares is a slight "buy," according to Thomson Financial, consisting of six "strong buys," eight "buys," 12 "holds" and one "underperform."
The largest portion of Wachovia's earnings comes from branch banking, in which it excels, and the rest from asset management, brokerage and capital markets. It entered into a brokerage joint venture with Prudential Securities in which it must work hard to establish brand recognition.
Earnings are expected to increase 9 percent this year, versus 8 percent expected for the money-center banking industry, according to Thomson. Next year's projected 8 percent increase and the forecast of a five-year annualized growth rate of 10 percent are in line with peers.
Several recent rulings have affected this Charlotte, N.C.-based bank.
The New York Stock Exchange fined Wachovia $2.25 million for failing to review and save electronic records relating to capital markets and securities from 1999 through last spring. In addition, an ex-Wachovia broker won $3.8 million against the bank after an NASD arbitration panel ruled he was wrongfully dismissed in the mutual-fund trading scandal.
Q: I'd hoped that my shares of Ariel Appreciation Fund would do better. What's the prognosis for them? -- C.L., via the Internet
A: Portfolio manager John Rogers Jr. has a mind of his own.
His avoidance of energy stocks and fondness for media stocks hasn't been a recipe for terrific returns lately.
Nonetheless, this fund that espouses patience and investment for the long term wasn't designed to shoot out the lights with hot growth stocks. It seeks discount-priced stocks of consistent, strong brands that have relatively low potential for volatility.
The $2.7 billion Ariel Appreciation Fund (CAAPX) is up 10 percent over the past 12 months and has a three-year annualized return of 10 percent. Both results rank in the lower one-fourth of mid-cap growth and value funds.
"This is a Morningstar analyst pick we strongly endorse because its fundamentals are strong," said Todd Trubey, analyst with Morningstar Inc. in Chicago. "Rogers is one of a group of portfolio managers who really attempt to follow the teachings and practices of Warren Buffett, and is someone we feel can produce great returns over long periods."
The fund owns no energy, software, technology hardware, telecommunications or utilities stocks. Its major concentrations are one-fourth in financial services, 20 percent in business services and 18 percent in media.
Rogers, who also manages the Ariel Fund, has more than 20 years of investment experience, with an emphasis on small- and mid-cap stocks. Morningstar considers Ariel Appreciation's concentrated portfolio of 32 stock names to be a quality diversifier for investors with large-cap portfolios.
As is sometimes the case with Buffett himself, such an unswerving strategy can lead to returns that are "quite lumpy," Trubey said. While holdings of the Carnival Corp. cruise line and media companies have hurt returns, Rogers confidently used the downturn as a buying opportunity.
Top portfolio holdings were recently Accenture Ltd., Tribune Co., Northern Trust Corp., Pitney Bowes Inc., Franklin Resources Inc., Carnival, Gannett Co., CBS Corp., Mohawk Industries Inc. and Black & Decker Corp. This "no-load" (no sales charge) fund requires a $1,000 minimum initial investment and has an annual expense ratio of 1.14 percent.
Ariel provides some of the best shareholder communications in the fund business, clearly explaining what its funds are doing.
Q: My company is offering a Roth 401(k) plan. How is it different from a regular 401(k)? -- P.L., via the Internet
A: Not many companies offer a Roth 401(k) in addition to their traditional 401(k). But many have been considering it since the government passed legislation this summer assuring it will be a permanent investment vehicle.
With a Roth 401(k), your contributions are made with after-tax dollars, but the account will grow tax free. Withdrawals taken during retirement will not be subject to income tax, provided you're at least 59 1/2 years old, and you have held the account for five years or more.
That's unlike a traditional 401(k), in which tax-free earnings face income taxes upon withdrawal.
"You can invest the same amount, $15,000 annually, as a traditional 401(k) and in the same type of investments, the difference being tax treatment of your contributions," said David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America. "For workers whose tax brackets are expected to be higher in retirement than when they're working, the Roth 401(k) is the better tax decision."
But if you anticipate being in a lower tax rate in retirement, stick with the traditional 401(k), Wray said.
Andrew Leckey is a Tribune Media Services columnist. E-mail him at email@example.com.