S&P Rank: 5 Stars
August 4, 2003
Quality Helps Check Risk
Quick Take: Eileen Rominger, manager of Goldman Sachs Mid-Cap Value/A (GCMAX), stresses attractively priced stocks of quality companies that generate cash over time. The fund's longer term results have shown the strategy has worked. For the five years ended last month, the portfolio rose an average annualized 7.8%, versus a gain of 6.6% for its mid-cap value peers.
More recently, the fund has lagged its peers, but Rominger says that's because lower-quality stocks have rallied. This year through July, the fund gained 9.0%, versus 15.8% for its peers. However, the fund has also taken on less risk than its peers, keeping sector weights about in line with those of its benchmark, the Russell Midcap Value Index, where tech has a relatively small weighting.
The emphasis on quality has led Rominger to Praxair Inc. (PX), a chemical manufacturer without the pension funding problems of similar industrial companies. The long view has also led her to Lamar Advertising `A` (LAMR), an outdoor advertising company unduly tarnished because investors don't realize outdoor advertising tends to lag in recoveries.
The Full Interview
S&P: What sets you apart from other mid-cap value funds?
ROMINGER: We focus on quality and price, which may be different from some value managers. Cheapness alone is not an adequate investment thesis. We invest in high-quality businesses that are positioned to generate cash over time. We tend to focus on companies run by managements that have maximized returns.
In addition, we like companies that don't need to reinvest a lot of capital, so their free cash flow can be used to increase dividends.
S&P: What's your overall view of dividends?
ROMINGER: I encourage people to think about emerging yield. One of the risks of chasing companies that pay dividends is that the earnings don't always cover the yields of high-yielding stocks. By focusing on emerging yields, we look at companies with strong balance sheets and free cash flow.
S&P: How do valuations figure in your process?
ROMINGER: As value investors, we have to be careful about valuations because a good company can be a bad investment if we pay too much for it. It's not unusual for a holding to have some controversy. The industry that it is in may be out of favor, for example.
S&P: Have any recent controversies led to opportunities?
ROMINGER: The question of pension plan funding has created opportunities for investors who are willing to look closely at the numbers. Many companies which don't have pension difficulties are being valued similarly as those with considerable liabilities. For example, Praxair Inc. (PX) has a very favorable pension funding position.
S&P: What are the fund's largest sector weightings?
ROMINGER: We don't massively overweight or underweight sectors. We look for value across all markets, so we don't rule out anything. We have a good presence in financials, which make up 20% to 25% of the portfolio, including banks, nonbanks, and insurance. That weighting is driven by attractive values. We like RenaissanceRe Holdings (RNR) and North Fork Bancorp (NFB).
S&P: What's your view of the technology sector?
ROMINGER: In technology, we are focusing on service-oriented companies. CDW Computer Centers (CDWC) is a service-oriented company that we like. They provide technology to small to mid-sized businesses that are difficult for big vendors to service because these markets are fragmented.
S&P: What is your turnover?
ROMINGER: Last year, it was about 70% to 75%. This year, we've found some interesting opportunities. Activision Inc. (ATVI), an entertainment software company, suffered an earnings shortfall, but their balance sheet is strong, and they are well positioned for the next couple of years.
Lamar Advertising `A` (LAMR), an outdoor advertising company, has been hurt because outdoor advertising hasn't picked up as strongly as network advertising. But outdoor advertising often lags, so we believe strength in network advertising will spread to outdoor advertising down the road.
S&P: Why have the fund's long-term returns been strong, while the more recent returns have somewhat trailed its peers?
ROMINGER: Our focus on quality worked well in 2001 and 2002. This year, lower quality stocks have had pretty good rallies, but we think it is important to stay with our long-term objectives.