Lipper Leaders Reflect Stock Picker's Mart Migration from Value to Growth Finally Afoot
February 27, 2006
NEW YORK - Let's just say they agree to disagree.
A septet of leading money managers from across the country recently gathered in midtown Manhattan to offer their perspectives on the state of the nation's capital markets, and their outlooks can all at once be characterized as bullish, bearish and anywhere in between.
Not surprisingly, however, the Lipper Leaders were unanimous in the notion that opportunities abound for their respective investment styles in the coming year.
The manager with the greatest reason to be enthusiastic might be Thomas Galvin of the Excelsior Funds in Boston. After years of smaller, value-like stocks outpacing their bigger, growth-oriented peers, the Russell 1000 Growth Index beat the Russell 1000 Value Index in each of the final three quarters of 2005, a development that hasn't occurred since 1999. So, this could be a breakout year for Galvin's Excelsior Large Cap Growth Fund, which against the wind has managed a return of 20.25% since its inception 34 months ago.
"It looks like it could be time for large-cap growth to reemerge. It's certainly been in hibernation for the last few years," Galvin said, adding that he expects corporate earnings to decelerate, which should lead to a narrowing within the market and an environment that further favors actively managed funds that are comprised of strong, organic growth companies.
Galvin's fund favors companies with earnings growth greater than 12%, a return on investment higher than 15% and three-year historical and future revenue of 10% or better. It limits its holdings to a modest 30 stocks, and international investment is held to 20% of the portfolio. It boasts $379 million under management.
Last year, it posted a 12% return against a 5% tally for its Russell 1000 benchmark. One key holding was Alcon, the nation's largest ophthalmology supplier. It grew in excess of 30% last year, and Galvin expects to squeeze another 20% to 25% out of it in 2006. Apple Computer, a stock Galvin has bought three times over the last 18 months, also had legs last year.
"For us it's always been about more than the iPod," Galvin remarked. "Is there a buzz around the iPod that creates a so-called halo effect and causes people to rethink buying Apple computers?"
That scenario seems to be playing out, as Apple's share of the Macintosh market was 1.5% two years ago and it stands at about 5% today. Mix in Apple's new retail stores, which add $1 billion in accessories sales annually, a new video iPod and an upcoming telephone iPod, and Apple's share of the Mac computer market will likely increase even further, Galvin said.
But while he's bullish on large-cap growth in 2006, Galvin thinks its popularity among investors will be a slow creep rather than a stampede.
"Nobody rang the bell in 1998 and 1999 to get into value, and I don't think anyone is ringing the bell now to get into growth," he said. "It will be a quiet emergence."
David Chalupnik of First American Funds, a $55 billion money manager in Minneapolis, said he's bullish on the equities market in 2006. Portfolio manager for the First American Mid-Cap Growth Opportunities Fund, Chalupnik thinks contained inflation, low long-term interest rates and an end to the Federal Reserve's rate hikes will drive valuations higher in 2006, perhaps close to a price-to-earnings ratio of 18, and create a recession-averse environment where mid-caps outperform large-caps.
"We are not looking for [a recession] in 2006," said Chalupnik, who manages $1.6 billion in assets across about 77 different stocks in the fund.
As one of the better-performing mid-cap funds - it's posted an annual return of 22.23% over the last three years, according to Lipper of New York - the fund is also uniquely positioned in 2006, as the shift away from small cap continues, he added. Chalupnik's assumption is that, as mid-cap stocks typically represent attractive companies with high-quality, established business models, excellent profitability and positive growth outlooks, they're in a sweet spot for burgeoning M&A activity.
Investors also have fewer alternatives these days.
"A lot of good small-cap funds out there are closed, so more investors are starting to migrate up the market cap realm," said Chalupnik, whose top holdings in 2005 included women's retailer Coldwater Creek, car audio manufacturer Harmon International and the jobs recruiter Monster.com.
Chalupnik's broad investment process combines quantitative and fundamental analyst research to focus on three key drivers of stock performance: business fundamentals, valuation and catalysts. But perhaps what make his fund and its parent firm most unique, is that everyone has skin in the game.
"Everyone has an incentive for our fund to outperform its peers and its benchmark," he said. "We are all aligned and working as one team."
Diane Sobin, portfolio manager for the $2.4 million Columbia Mid-Cap Value Fund at Columbia Management in New York, also thinks the market's growing M&A activity bodes well for her category.