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Thyra Zerhusen of ABN AMRO Mid-Cap Fund

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Quick Take: Despite the market’s ups and downs, there are always opportunities down the road, says bargain hunter Thyra Zerhusen, who runs ABN AMRO Mid-Cap Fund/N (CHTTX). The manager generally looks ahead to where a stock will be in one year; so, unlike many Wall Street investors, she doesn’t mind if it has a bad quarter.

The mid-cap segment of the market often provides overlooked bargains that “fall through the cracks,” according to Zerhusen, because investors more often focus on large- and small-cap stocks.

Looking ahead, the manager predicts gains for consumer discretionary stocks, including Reader`s Digest Assn (RDA), Scholastic Corp. (SCHL), and Borg Warner (BWA).

Zerhusen’s strategy has met with success. For the five-year period through June, the fund rose an average annualized 9.2%, versus 5.4% for its mid-cap blend peers. This year through the end of July, the fund was up 24.5%, versus 18.2% for its peers.

The Full Interview:

S&P: Have you found fewer attractively-priced stocks because of this year’s market rally?

ZERHUSEN: There is always something to buy. Companies have a bad quarter, so the stock falls. At the end of the first quarter, I found several attractive names, including Andrew Corp. (ANDW), Veritas DGC (VTS), and Reuters Group ADS (RTRSY).

S&P: What’s your approach to valuations?

ZERHUSEN: I look at various criteria: price/earnings multiples, growth rates, and in some industries, market cap to revenue ratios. Right now, Reader`s Digest Assn (RDA) and Scholastic Corp. (SCHL) are selling at fractions of their revenues. Basically, my decisions are bottom up.

S&P: Scholastic has had difficulties over the years with various operations, including its book clubs.

ZERHUSEN: They’ve had the Harry Potter books for the last few years. They were recently weak, and the stock fell, so I added even more.

S&P: Why should investors consider mid-cap stocks?

ZERHUSEN: They fall between the cracks. Most stock holders focus on large-cap and small-cap stocks, so the mid-cap segment is somewhat overlooked and less efficient than other areas. You can find mid-cap companies that are growing faster than large-cap companies and have better liquidity than small caps. Also, it’s easier to get access to managements of mid-cap companies than of large-cap companies. I talk to the CEOs of some of my mid-cap holdings.

Also, I often find companies that are not well covered by Wall Street analysts. I owned a stock that wasn’t covered by any Wall Street analysts — Wallace Computer — that was taken over this year.

S&P: What is your turnover?

ZERHUSEN: I like to have a turnover rate of about 45% and aim for no more than 35 holdings. I do a lot of my own research, so I focus on a small number of companies. I don’t want to have more than a 6% position in any one stock. Once it gets to 5%, I trim it.

S&P: The fund tends to be more volatile than its peers?

ZERHUSEN: Several holdings have been taken over, so I had to reinvest the money. Some of my new positions initially went down.

S&P: Why does the fund have good long-term returns?

ZERHUSEN: I can live with a stock that has one bad quarter. I always ask where could a stock be one year from now.

S&P: Would you mention a long-term holding that you particularly like?

ZERHUSEN: I’ve owned Amer Power Conversion (APCC) for a long time, but sometimes the stock runs up, so I periodically trim my holdings.

S&P: What are the largest sectors in the fund?

ZERHUSEN: Consumer discretionary is over 25% of the fund. My holdings in that sector include Readers Digest, Reuters, and Borg Warner (BWA). Information technology is over 20% of the fund. Stocks in that sector have risen, so I’ve been trimming some positions. I own Unisys Corp. (UIS), my biggest holding, Progress Software (PRGS), and Andrew.