These are not the best of times for large-cap growth funds. Like the rest of the sluggish economy, such funds have been hit hard by the slowdown in technology, consumer spending, and the events of September 11. In the midst of this uncertainty, the Whitehall Growth fund (WHGFX) is battling through. Manager Paul Blaustein, who has run the fund since August 1998, has led Whitehall Growth to a five-year annualized return of 13.25% as of September 30, 2001, despite a -22.70 year-to-date return. The fund remains strong among its large-cap peers, ranking 18 out of 467 funds since its inception in February 1995, according to Standard & Poor’s. Blaustein, who was vice president and portfolio manager at Desai Capital Management prior to joining Whitehall Asset Management, sticks to true long-term investment strategies and believes research is essential. “My philosophy is to never put an issue to bed,” Blaustein says. “Never think you’ve got the answer. The investment business is a process and a journey. We’re basically making decisions under substantial uncertainty and as an investor you have to realize that. It’s not ‘Yes’ or ‘No’ and then move on to the next thing.”
Blaustein likes companies that have at least a 10-year track record and that make a product with sustainable growth. “The concept of sustainability and conviction really requires the company and the management to have established some record over time in different market environments,” he argues. “A young company may have a concept, but it’s very possible that in three months another company may come up with a better concept. Or that in 18 months everyone who has any use for a certain product will own it and then it’s all over.”
This is why Blaustein sees future growth even in times as bleak as these. Blaustein believes technology will continue to flourish over the next several years, and says we haven’t seen the end of the tech boom. “I don’t think the 1990s are over,” he claims. “We’ve only gone slightly toward penetrating markets and fully utilizing information technology. I think we will have an above-average growth decade.” Positive words in negative times from a portfolio manager who is able to look past short-term results.
The last 18 months have been tough. Are you poised for a rebound? We have a very strictly defined discipline that is designed to produce long-term performance. We don’t really focus on near-term market forecasts. We try to look at investing as a participant should, figuring if you’re going to be successful over the long term as an investor that you have to invest in things that do well over the long term. We try to identify companies that represent very good businesses and we try to participate as owners over the long term in those businesses. That is what we look for when the market is going up and that’s what we look for when the market is going down.
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The theory is that you’ll make a lot of money when the market is strong and you won’t lose as much on the downturns. We’re trying to, first, outperform over the course of a market cycle of five years, and, second, trying to do it consistently.
A superior business is defined in terms of three characteristics. First is growth: if a business is growing, it is increasing in value. Growth is really defined in terms of unit growth, not in terms of a company that had temporarily depressed profit margins and is improving its profit margins. That’s not really growing.
The second factor would be profitability. Again, if you want to have superior performance isn’t it more likely that you can accomplish that with companies that are more profitable than the average? So we focus very much on companies that have superior returns on capital. In looking at the income statement we also prefer a company that has high margins. High margins tell you there’s something different about the business. We want to understand why the potential is there for superior profit and growth and that means we need to really understand the business and what’s unique about it.
The third factor is sustainability. You want to invest in companies with superior performance that can sustain it over time. That’s a combination of our understanding of the business and why it’s done well, management having demonstrated a capability of running it successfully over time, and stability.
With all the short-term volatility that exists right now, what sectors are you looking at? We really don’t do any sector work per se. We don’t say that a sector looks attractive. We don’t say we have a 10% weight, let’s go to 15%. We look at individual companies. That having been said, if you’re looking for companies that have the characteristics that I’ve outlined above, it doesn’t take a great deal of thought to figure out that certain industries or sectors just aren’t going to have them. And certain industries or sectors are more likely to have them. By its very nature we are going to spend more time looking at companies in technology, healthcare, entertainment, financial services, consumer goods, and business services.
What draws you to have such a large allocation to technology? Clearly it’s a lot easier to grow by producing products that didn’t exist before because then you don’t worry that your prospective customers already own it. It’s easier to grow if you can reduce the cost of what you produce so that more people can afford to buy it or afford to use it in different applications. This is seen as expanding the addressable market for the same product. Also, I think technology gives you more opportunity to differentiate the product. For example, if you use copier paper, do you know who made it? Do you really care? But with technology products there’s tremendous opportunity to have non-commodities, to have products that are distinctly different at least in the customer’s perception as to what is available.
So since there’s room to differentiate, there’s room for growth? Room to differentiate means there’s room to establish a relationship with a customer where the customer derives specific value from using your product and is willing to pay more for it. Obviously we prefer a company that can sustain that advantage, like a Microsoft or Wal-Mart. It’s not just that today they have something that you want, but most likely you will continue to want that product or something else from that company a year from now or in 36 months.