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August 25, 2003 at 08:00 PM
S&P Rank: 5 Stars
August 4, 2003
Quality Helps Check Risk
Quick Take: Eileen Rominger, manager of Goldman Sachs Mid-Cap Value/A (GCMAX), stresses attractively priced stocks of quality companies that generate cash over time. The fund's longer term results have shown the strategy has worked. For the five years ended last month, the portfolio rose an average annualized 7.8%, versus a gain of 6.6% for its mid-cap value peers.
More recently, the fund has lagged its peers, but Rominger says that's because lower-quality stocks have rallied. This year through July, the fund gained 9.0%, versus 15.8% for its peers. However, the fund has also taken on less risk than its peers, keeping sector weights about in line with those of its benchmark, the Russell Midcap Value Index, where tech has a relatively small weighting.
The emphasis on quality has led Rominger to Praxair Inc. (PX), a chemical manufacturer without the pension funding problems of similar industrial companies. The long view has also led her to Lamar Advertising `A` (LAMR), an outdoor advertising company unduly tarnished because investors don't realize outdoor advertising tends to lag in recoveries.
The Full Interview
S&P: What sets you apart from other mid-cap value funds?
ROMINGER: We focus on quality and price, which may be different from some value managers. Cheapness alone is not an adequate investment thesis. We invest in high-quality businesses that are positioned to generate cash over time. We tend to focus on companies run by managements that have maximized returns.
In addition, we like companies that don't need to reinvest a lot of capital, so their free cash flow can be used to increase dividends.
S&P: What's your overall view of dividends?
ROMINGER: I encourage people to think about emerging yield. One of the risks of chasing companies that pay dividends is that the earnings don't always cover the yields of high-yielding stocks. By focusing on emerging yields, we look at companies with strong balance sheets and free cash flow.
S&P: How do valuations figure in your process?
