Quick Take: The Meridian Growth Fund (MERDX) shunned Internet and technology stocks in the late 1990s because portfolio manager Richard Aster Jr. thought they were too expensive.

However, Aster says he began moving into the tech sector last year because valuations there had fallen to levels he thought looked good. Technology and telecommunications stocks now make up about 30% of the assets of the $547 million fund.

Aster runs a concentrated portfolio of about 45 stocks, focusing on inexpensive shares of companies he thinks can increase earnings by 15% or more per year. He also favors financially strong industry leaders.

Aster’s approach has kept Meridian Growth ahead of similar funds, and the S&P 500, recently and over the long run. This year through August, the fund surged 31.6%, versus a gain of 23.4% for its mid-cap blend peers. For the five years ended last month, Meridian Growth returned an average annualized 17%, versus 12% for its peers, and 2.5% for the index.

The Full Interview:

Less is more for Richard Aster Jr. The Meridian Growth fund that he manages usually holds only about 45 stocks. Increasing the portfolio’s membership would only pull its performance closer to average, he believes.

Concentrating the fund’s investments facilitates stock analysis and enables winners to significantly boost returns, Aster says.

“We would like to focus on the companies we like, understand them well, and make them count,” he says.

A company Aster liked enough to buy not long ago is Dollar Tree Stores (DLTR), a discount retailer that sells all its merchandise for the fixed price of $1. The company, which Aster began investing in within the last two months, has little debt, generates sufficient cash to finance expansion, and sports an approximately 20% return on equity, he says.

“I think their growth for the next three to five years is going to be fine,” Aster says. “The business is stable and the (stock’s) valuation is okay.”

Dollar Tree’s shares trade for around 19 times earnings, says Aster. The manager wants to own inexpensive stocks, a fact that he maintains distinguishes him from his fellow growth-oriented money managers.

In picking stocks, Aster keeps his eye peeled for companies he thinks can increase earnings by at least 15% per year while hopefully boosting their top lines at a comparable rate. He also prizes strong balance sheets and cash flow. Aster hunts for companies with market caps of $300 million to $2 billion.

Another recent addition to the fund is Advent Software (ADVS), a manufacturer of software for investment management. “They are by far the leader in this business,” Aster says of the San Francisco-based company, which he started buying about three months ago. Aster adds that he expects Advent to prosper as the improving stock market strengthens the company’s customers.

Technology stocks like Advent combined with telecommunications stocks account for about 30% of the fund’s assets, comprising its largest sector allocation. Aster says he began building up his position in these companies last year, when their valuations had fallen to levels he found attractive. “We sort of try to buy the growth companies in the growth areas when they’re out of favor,” he says.

The fund’s No. 1 stock is communications equipment maker Andrew Corp (ANDW). Aster describes the company as the leading or second largest player in the markets it serves. Despite weakness in those areas over the last few years, Andrew has remained profitable because of cost cutting, and now is poised to do well as companies spend more on telecommunications and television equipment, Aster says.

Aster cites Andrew as one of the fund’s best performers this year. Other technology stocks that he says have helped the fund this year are Amer Tower`A` (AMT), which owns and operates towers for wireless communications; FileNet Corp (FILE), which makes software for managing written materials and electronic mail; and Plantronics Inc (PLT), which manufactures communications headsets and specialty telephone products.

In addition to tech stocks, Aster says lately he has been trying to identify businesses that will benefit if the U.S. economy continues to pick up steam. A company he owns that he puts in that category is United Rentals (URI), which leases equipment to companies and homeowners.

The company’s market share is greater than its competitors and has been rising, Aster says. With help from the economic rebound, United Rental’s profits could rise by 15% or more over the “next few years,” he says.

Another of the the fund’s major holdings is DaVita Inc (DVA), which operates centers in the U.S. that provide kidney dialysis to people suffering from chronic kidney failure, also known as end-stage renal disease. DaVita’s business does not depend on the health of the economy and is “very predictable,” says Aster. The stock also features an attractive P/E of about 12, he notes.

The fund’s largest positions also include a stake in restaurant chain Ruby Tuesday (RI). Aster believes the company can increase the number of units it operates by 10% annually while boosting sales in those open at least a year by 2%-3%. If it can improve its margins, the company can grow earnings by 17%-20% “for a considerable period of time,” according to Aster.

When it comes to selling, Aster will unload a stock if a company’s financial picture darkens, or if its shares become too pricey. But he doesn’t sell often. The fund’s annual turnover rate tends to be about 25%, he says. “We’re looking for companies that we can own for three to five years,” he says.