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October 20, 2003 at 08:00 PM
Oct. 8, 2003 — When Conrad Herrmann visits a company he invests in, he doesn’t necessarily rack up frequent flier miles.
Herrmann works in California, the state that’s home to the bulk of the holdings of the $1.6-billion Franklin Strategic Srs:Flex Cap Growth Fund/A (FKCGX) that he manages.
About 70% of the companies in his portfolio are headquartered, or have the majority of their operations in the Bear Flag state, Herrmann estimates. The 12-year-old fund, which once had California in its name, was originally intended to leverage the local resources of Franklin Templeton Investments, which gets its mail delivered in San Mateo, he explains.
Having convenient access to people who run the companies he buys, as well as reading area newspapers that follow these businesses, gives Herrmann and his team of stock pickers and analysts a better sense of what’s happening with their investments, Herrmann says.
In competing with funds that have no geographical mandates, Franklin Flex Cap Growth has held its own lately. The fund returned 5.9% in the third quarter, and was up 22.9% this year through September. By comparison, the average mid-cap growth fund gained 22% and 5.4% in those periods. For the ten year period ended in September, the fund returned an average annualized 14.6%, versus 7% for its peers.
“We look at it as being a vast, diverse marketplace,” Herrmann says of California, which standing alone would be the fifth largest economy in the world, he points out. There are about 1,000 publicly traded California companies that meet his investment criteria, he says.
Part of the portfolio is made up of companies with leading or dominant market shares, and that generate high returns on capital, as well as “reasonably consistent and predictable earnings,” Herrmann explains.
Two examples of these types of companies Herrmann cites are Cisco Systems (CSCO), which makes equipment for computer and telecommunications systems, and Seattle-based Expeditors Intl,Wash (EXPD), a logistics company. Both have been in the fund for a number of years. Cisco has 24 stocks ahead of it in the portfolio.
Expeditors, the fund’s seventh-largest holding, said last month that it expects third quarter earnings to lag Wall Street estimates. “But we feel this is just a short-term blip,” Herrmann says. “This is a company that we believe is still well positioned for the future.”
The biggest chunk of the portfolio, which usually includes 65-100 stocks, is made up of temporarily beaten down stocks whose valuations Herrmann thinks can improve.
