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Portfolio > Portfolio Construction

Duncan Evered of AXP Select Equity Fund

By Staff Writer

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Quick Take: Portfolio manager Duncan Evered joined the AXP Equity Select Fund/A (INVPX) with Paul Rokosz in February 2000, just before the stock market peaked and began falling.

While the $1.8-billion fund has bounced up and down over the last three years, it has stayed ahead of its peers most of the time. AXP Equity Select lost 5.5% on average, versus a loss of 14.3% for similar funds, for the three years ended last month. For the five-year period ended in May, the portfolio rose an average annualized 2.5%, versus 0.7% for its peers.

Evered, who hunts for growth stocks, has reemphasized mid-sized companies in the portfolio since taking over the fund, which he now runs solo. Rokosz began piloting the AXP Strategy Aggressive Fund/A (ISAAX) a year ago.

The Full Interview:

For investors, it was the best of times, but it was about to become the worst.

When Duncan Evered joined the AXP Equity Select Fund in February 2000, stocks were peaking. A month later, the technology bubble burst, setting the stage for a three-year bear market.

As luck would have it, Evered began shedding many of the fund’s tech and telecommunications stocks when he came on board and before they began spiralling downward.

Although holdings like Cisco Systems (CSCO), Intel Corp (INTC), and Nokia Corp ADS (NOK) had been long-term winners, they had grown too big for the fund, which is mandated to own mid-sized companies, Evered explains. “They were all really good sales,” he adds.

In picking stocks, Evered trawls for companies with market caps of $1 billion to $8 billion that are increasing profits. His interest is piqued by sustainable annual earnings growth of more than 15%. Next, he wants to see strong balance sheets. Beyond that, he favors industry leaders with a competitive edge, like patents.

As for prices, “I live with growth companies going through periods of over-and-undervaluation,” Evered says.

Evered’s portfolio is relatively concentrated, consisting of 50-70 stocks, with the top ten typically accounting for about a third of the fund’s assets, he says. Taking on more companies wouldn’t improve diversification, and would make analysis more difficult, he maintains.

The fund’s No. 1 stock at the end of the first quarter this year (Evered declines to discuss his recent trading activity) was Whole Foods Market (WFMI), a supermarket chain that specializes in gourmet natural and organic foods. Evered describes the company as a “significant player” in that industry niche, which he says is getting bigger.

Next in line in the portfolio was Williams-Sonoma (WSM),a home products retailer that Evered says is a “superb” merchant with a loyal customer base. He is also impressed with the team of financial executives who joined the company two years ago, who he says have helped it cut costs. Like Whole Foods, Williams-Sonoma also generates “solid earnings growth,” Evered notes.

Biomet, Inc (BMET), which makes artificial bones and dental implants, was the fund’s third-largest holding. The company looks good because the orthopedics industry is expanding and because Biomet has been able to grow internally and through acquisitions, Evered says.

It’s steady revenues made Fiserv Inc (FISV), which processes electronic data and manages information systems, attractive to Evered. The Brookfield, Wisc.-based company held fourth place in the fund.

Filling out the fund’s top five holdings at the end of March was Fair Isaac (FIC), which provides analytical data for businesses. The company has also started making its products and services available to individuals, a move he applauds, Evered says.

Overall, the the companies in AXP Select Equity’s portfolio have an average market cap of about $5 billion, compared to $50 billion when he began running it, Evered says. Mid-sized companies have advantages over small and large ones, he argues, because while they are established and profitable, they still have room to grow.

“They’re not teenagers wobbling on their legs,” he says. “They’re also not aging beauties.”

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