The strict methodology had produced stellar returns. The $304-million fund gained 12.8% for the year ending January 31, 2005, versus a gain of just 2.2% for the average large-cap growth fund. For the three-year period, the fund returned 5.2%, versus a decline of 0.4% for the peer group. Over five years, the fund slipped 3.5%, but that still beat its peers, which dropped 7.0%.
Price has co-managed the product since its inception in December 1997. The portfolio is ranked 5 Stars by Standard & Poor's.
The Full Interview:
S&P: Describe your stock selection process for this fund.
PRICE: We seek to maximize returns while minimizing risk by investing in large-cap growth companies we think have strong risk-reward characteristics. To find stocks for the portfolio, we use a three-step process. We begin with a universe of domestic stocks with a minimum of $10-billion market cap (at the moment, this universe represents about 435 names).
Every week, we screen this batch using a quantitative method to identify inefficiently priced companies; i.e. stocks that are outperforming the overall market and possess, among other things, strong earnings growth, expanding profit margins and high free cash flow. Then, we calculate standard deviation to weed out stocks that are too volatile. After that, we examine the stocks' underlying fundamentals to understand why they are outperforming. By now, we have whittled our universe down to about 50 names. From this group, we construct a portfolio of between 35 and 40 stocks that are nicely diversified by sector.
S&P: What limits do you impose on the portfolio?
PRICE: We don't allow any individual holding to occupy more than 5% of the fund's total assets. We typically take an initial position of 1.5% to 2% in our stocks.
In addition, we usually don't take any big sector bets relative to our benchmark, the Russell 1000 Growth Index, although we don't place any limits in that respect.
S&P: What are your largest holdings?
PRICE: As of Feb. 28, 2005: Burlington Northern Santa Fe (BNI), 4.1%; Aetna Inc. (AET), 3.9%; Encana Corp. (ECA), 3.8%; Dell Inc. (DELL), 3.8%; Becton Dickinson & Co. (BDX), 3.7%; Hershey Foods Corp. (HSY), 3.6%; Apple Computer Inc. (AAPL), 3.6%; Infosys Technologies (INFY), 3.6% ; America Movil S.A. (AMX), 3.5%; and Mobile Telesystems (MBT), 3.4%.
S&P: What are your top sectors?
PRICE: As of Feb. 28, 2005:information technology, 21.4%: energy, 17.8%; health care, 16.7%; consumer discretionary, 12.3%; consumer staples, 11.2%; telecommunications, 8.8%; industrials, 6.3%; financials, 3.4%; and materials, 2.1%.
Relative to the benchmark, we are currently overweight in energy, while the other allocations are pretty close to equal-weightings.
S&P: Can you discuss some of your favorite stocks?
PRICE: Apple Computer (AAPL) scored extremely well in out quantitative screens as it outperformed the market by steadily rising in price. On a fundamentals basis, their sales and earnings growth is spectacular. They generate huge cash flow, and they run an efficient operation with hefty margins. They have the money to develop the next "big thing" in the PC business.
eBay (EBAY), which suffered a price decline in late January due to some tepid fourth-quarter earnings, remains one of our favorite holdings because of its broad brand-name recognition and solid business model. They enjoy tremendous cash flow and they're so dominant that they're a virtual monopoly in the online auction industry. eBay recently signed a $300-million project in China, and they may expand their business into India as well. We think eBay can enjoy further upside.
S&P: Given the continued high oil prices, what is one of your top energy stocks?
PRICE: Exxon Mobil (XOM) has dramatically outpaced the market in price performance, but the stock has not been volatile at all. The company generates huge free cash flow with earnings and sales at record levels. Although the company has benefited from high oil prices, that is not the reason we bought it. Exxon and certain other energy stocks have simply passed our screening criteria.
S&P: A number of your top holdings are foreign companies.
PRICE: We will invest in ADRs if they fulfill our screens, but we won't have more than 10% of the fund in foreign stocks. It is difficult for ADRs to make it into our fund because, in many cases, they don't report their financials according to U.S. standards. ADRs often get rejected based on our fundamentals analysis.
S&P: What are your sell criteria?
PRICE: We will scale back a holding once it surpasses our 5% threshold, which Apple Computer did recently. Our annual turnover ratio is about 65%, and much of that is accounted for by trimming and adding to existing positions.
S&P: Can you cite a stock you recently sold off outright and why?
PRICE: We sold Cisco Systems (CSCO) in early January when its stock performance couldn't keep pace with the market. We had made a 35%-40% profit on the stock. The company's fundamentals were still strong, but it slipped on our quantitative screening process.
S&P: What is your outlook for large-cap stocks in 2005?
PRICE: We think the present climate is quite beneficial for the large-cap growth sector. The U.S. markets are witnessing a broad-based economic rally with corporate America delivering record levels of profits. The geopolitical scene is relatively stable, consumer sentiment is strong, housing prices are solid, and employment is high. Although the Fed will likely continue to raise rates, they still remain at relatively low levels. Moreover, the weak dollar actually benefits large-caps because so much of their business comes from overseas.
Contact Bob Keane with questions or comments at:email@example.com.