June 5, 2003

Fund in Focus: Noah Fund

John Geewax, portfolio manager since January 1998

S&P Rank: 3 Stars

Building a Tighter Ship

May 30, 2003 -- For investors who adhere to conservative Christian principles and seek to align their spiritual values with their investments, the $8.5-million large-cap Noah Fund (NOAHX) will shun what the Bible shuns.

This year through April 30, the fund has risen 6.4%, versus a gain of 5.6% for the average large-cap growth fund. For the five-year period ended in April, the fund lost 5.6%, versus 4.4% for its peers. Standard & Poor's upgraded its raking on the portfolio to 3 Stars from 2 in March, 2003.

Founded in May, 1996, by William L. Van Alen Jr., chairman of Polestar Management Company, the portfolio's day-to-day operations have been directed by John Geewax, a general partner of Philadelphia-based investment advisor, Geewax, Terker & Co., since January 1998.

Van Alen and his advisory board reviews and monitors the universe of large-cap U.S. companies and excludes those deemed to be engaged in "sinful" or "anti-Christian" businesses and practices. He automatically disqualifies companies engaged in the production or distribution of alcohol, tobacco and gambling. In addition, companies with connections to pornography and abortion are rejected in this conservative Christian growth offering. That leaves out most media, entertainment, hospital and drug firms.

"If a hospital provides abortions, they are screened out and are excluded from the fund," Van Alen said. "If there is a hospital that refrains from abortions, then we would consider them for the fund," he added. "If they are manufacturing products related to abortion, the fund can not invest in them." Van Alen, however, will not necessarily exclude companies which donate money to Planned Parenthood, or provide benefits to partners of unmarried or homosexual employees. "This would not concern us, because it is done after the manufacturing/production process," he noted.

While some other "socially responsible" funds would shun companies that manufacture guns, or are involved in defense or nuclear power, the fund may invest in these areas. In fact, it once held Boeing (BA) in the portfolio. Van Alen explains that gun manufacturers, or defense contractors, are acceptable because "according to the bible, we have the right to defend ourselves."

In the event that one of the companies in the fund does something to violate Christian-based philosophies, Van Alen would instruct Geewax to eliminate the holding. If Microsoft Corp (MSFT) were to suddenly purchase a casino, for example, it would be out. When AOL merged with media giant Time Warner, the fund had to immediately drop AOL from its portfolio.

Once the offending companies are ferreted out, Geewax is free to invest as he sees fit. As a growth manager, he's looking for high earnings and revenue growth, or companies that can finance their growth through internal or external means and provide a high return on capital. He especially likes stocks of companies with strong cash flow and low debt that are not too highly levered.

Geewax carefully avoids businesses on the verge of bankruptcy, or in danger of having their bonds downgraded by a ratings agency. He also dislikes companies with volatile stock prices, have just suffered a negative earnings surprise, or that have significant insider selling.

The fund's top ten holdings as of March 31, 2003, were: Wal-Mart Stores (WMT), 9.87%; Microsoft Corp (MSFT), 8.65%; Intel Corp (INTC), 5.29%; Dell Computer Corp (DELL), 4.04%; Doral Financial (DRL), 3.61%; Cisco Systems (CSCO), 3.58%; Federal Natl Mtge (FNM), 2.71%; Federal Home Loan (FRE), 2.04%; Respironics Inc (RESP), 1.90%; and Abbott Laboratories (ABT), 1.86%.

As a risk-control measure, Geewax likes a replete portfolio for the Noah fund, though it's not exactly laden with two of every kind of stock. The fund currently has 88 issues in total, but can go as high as 100. The manager is not afraid to make big bets on his favorite holdings: The top ten stocks accounted for 43.55% of total assets as of March 31.

One of Geewax's favorite holdings is retailing giant Wal-Mart. "They have had extremely positive news of late," he noted. "We currently have nearly a double-weighting in Wal-Mart relative to our benchmark, the Russell 1000 Growth index." According to Geewax, Wal-Mart is taking market share away from its competitors, and increasing margins by controlling its supply chain, as well as by re-branding some poor-performing brands as Wal-Mart-label products.

Although Geewax has the four horsemen on technology on board, represented in his top ten, the fund's tech exposure is only a few points higher than that of the benchmark, about 24% versus 22%. That tech weighting, however, has detracted from performance the past few years, as stocks of large-cap growth companies, particularly tech stocks, have suffered badly. Noah fund fell 23.5%, versus a loss of 19.8% for the average large-cap growth fund, for the three-year period ended in April.

The fund's second largest sector, financials, also represent an over-weighting, and make up three out of the top ten holdings in the portfolio. "Keep in mind we are in a market environment now where almost any growth can be viewed as high growth," noted Geewax of the weighting. "Having said that, our financial holdings are genuine growth companies." He cites Doral Financial's business, which is focused on Puerto Rico and the Caribbean, as an example, since mainline banks are disappearing from the region. With respect to Fannie Mae and Freddie Mac, Geewax says they are delivering high growth relative to overall bank earnings.

As a growth manager, Geewax is unlikely to invest in certain sectors, including regional banks, electric utilities, savings and loans, integrated energy, and autos, among others. In terms of his sell discipline, he is quick to unload a stock if something goes wrong with a company's operations, as illustrated by the fund's 186% turnover rate over the last three years. He recently sold Staples Inc (SPLS), because he felt its price expanded to a level where the underlying growth could not be sustained. Cardinal Health (CAH) was also sold since it was facing downward revisions on its earnings estimates.

As part of the fund's devotion to Christian giving, Van Alen donates part of his management fee to charities, missions, discipleships, or the needs of the poor. From the 1% management fee on the fund, ten percent is donated to charities through Polestar. The fund carries a relatively high expense ratio, 2.20%, versus 1.57% for the average large-cap growth fund, and 1.84% for the average socially conscious fund, making it more expensive to own. Though the Noah fund has a small asset base to date, some of that is due to the costs of screening and research, Van Alen explained.

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