Quick Take: Surviving downturns, even depressions, is the clearest sign of a quality company, says Theodore Parrish, co-manager of Henssler Equity Fund (HEQFX). Quality companies -- based on independent rankings, management strength, and dividend yields -- generate the best long-term returns, according to Parris. The manager says this approach pays off because quality companies hold up better in downturns and produce competitive returns in rallies.
The fund's returns suggest it has benefited from this strategy. This year through October 14, the fund rose 22.6%, versus a 20.9% gain for the S&P 500. For the five-year period through last month, the fund rose an average annualized 6.2%, compared with a gain of 0.7% for the average large-cap blend fund.
The Full Interview:
S&P: What are the main features of the fund's strategy?
PARRISH: Gene Henssler, the fund's founder, believes in financially strong companies that will survive the next depression, not just the next recession. We look at stocks ranked A- or better by Standard & Poor's and A or better by Value Line.
Our process is about 60% quantitative and 40% qualitative. We screen for financial management, interest coverage ratios, and high dividend yields. Liquidity is important, so we look for companies with 150,000 or more shares traded daily.
S&P: What qualitative criteria do you consider?
PARRISH: I like managements that communicate well with Wall Street. I pay attention to how management handles past difficulties. The companies we invest in have long histories, including previous recessions.
S&P: You look for companies that will survive deep downturns -- but isn't that the case for most large-cap companies?
PARRISH: We've seen companies with deteriorating financials, such as J.P. Morgan Chase & Co (JPM). If a large company is in trouble, it's usually a slow deterioration.
S&P: Do you ever tilt toward growth or value, given that the fund is a blend offering?
PARRISH: We try to maintain a balance between growth and value. We aim for above-average growth and a beta lower than the market. We try to be less volatile, especially on the downside, so we can benefit from a flight to quality in down markets.
S&P: What is the fund's turnover?
PARRISH: It's about 22% annually. We look to hold stocks for three to five years. Over half of our 20 or so holdings have been in the portfolio since inception.
S&P: Would you mention a long-term holding that you continue to like?
PARRISH: Johnson & Johnson (JNJ) is a core holding that I can't imagine not having. It's a mutual fund of health care -- they have over 100 units across the health-care spectrum. They've had no financial fraud, good acquisitions, and great communication with Wall Street.
S&P: What stocks have you recently added to the portfolio?
PARRISH: Last quarter, we purchased shares of Amer Intl Group (AIG) and Bank of America (BAC). AIG is in the middle or late portion of a great underwriting cycle. They have pricing power, and are likely to see moderate increases in premiums. There is a succession question, but the company has probably already decided on a successor.
S&P: Do you think the market timing questions about Nations Funds will affect Bank of America?
PARRISH: These questions won't keep the company from meeting its medium- to long-term goals. They may impact their asset management operations, which the company is looking to grow, but Bank of America is the best coast-to-coast bank and has a huge customer base.
S&P: Have you sold any stocks recently?
PARRISH: Last quarter, I trimmed T.Rowe Price Group (TROW), but it was more of a price move. It's an investor friendly company with exposure to equity markets. I don't think they will be independent for much longer, but I don't own it as a takeover play.
I've also reallocated money within technology from higher priced names, such as Intel Corp. (INTC) and Microsoft Corp. (MSFT), to less pricey companies, such as Affiliated Computer Svcs`A` (ACS). I'd rather miss 15% on the upside than 15% on the downside.
S&P: What are the fund's largest sectors?
PARRISH: Health care, financials, and technology. We are 30% overweight in health care. In health care, I own some medical device companies and some generic companies, including Mylan Labs (MYL), which is my largest holding. I also like Pfizer, Inc. (PFE), which currently has the best drug pipeline and the largest research and development budget in the sector.
S&P: Why does the fund have good long-term returns?
PARRISH: In 2000, we decided to get out of tech stocks due to valuations. We're also ahead because of our emphasis on quality. We won't beat the market in years like 1999 because we maintain a well-diversified portfolio.
S&P: What your view of the questions about market timing of mutual funds?
PARRISH: It's a disgrace. The big companies with large assets under management already have an advantage through distribution, but they still cheated. If you stick with your investment strategy, you shouldn't have to cheat.