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Mike Balkin of William Blair Small Cap Growth Fund

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Quick Take: Investors need to be forward looking, says Mike Balkin, co-manager of William Blair Small Cap Growth/A (WBSAX). Balkin patterns his investment philosophy after the hockey playing of Wayne Gretzky, who he says was known for skating to where the puck will be. Following this strategy, Balkin says his first goal for any potential stock holding is that its earnings are likely to grow at least 15% on a sustainable basis.

While this 15% growth is key, the manager says valuations are also important. “Everything has its price,” adds Balkin, who also looks at a stock’s price history because the market can overreact in both directions.

While Balkin has succeeded in this year’s rally, he’s also held up better than most of his peers in recent years without assuming any more risk. This year through September 18, the fund surged 47.1%, while the average small-cap growth fund rose 35.6%. For the three years through last year, the fund gained 11.7%, on average, versus a 17.6% drop for the peer group.

The Full Interview:

S&P: What are the main features of your investment process?

BALKIN: We look for companies that can grow their earnings by 15% or better on a sustainable basis. We focus on superior performance, so we’re more likely to pay for companies with this 15% earnings potential rather than chase the next fad. We also like strong management because small companies often depend on the vision of a few key people. This is different from many large companies where the CEO can step down, and the company doesn’t miss a beat.

S&P: Do you consider valuations?

BALKIN: We don’t believe you can be a growth manager and not pay attention to valuations. Everything has its price, so you have to consider risk-reward. Sometimes great companies don’t make great stocks. As a result, we look at stocks relative to their historical valuations, their peers, and the overall market. Companies with the same growth characteristics can trade at very different multiples.

S&P: What’s your view of current market psychology?

BALKIN: There is a little bit of irrational exuberance right now. A lot of money is flowing into the market, especially into small-cap stocks. When we look at the market, we’re aware that it can overreact in both directions. Right now it is very favorable toward technology stocks. A lot of people are giving tech companies credit for normalized earnings before it is clear how that will play out.

S&P: What are the fund’s largest sectors?

BALKIN: We are underweight in technology. Historically, we’ve favored consumer discretionary companies because we like many of the business models in that area. A lot of business services companies, including education and gaming firms, have more predictable earnings growth.

S&P: Why does your fund have solid long-term and short-term records?

BALKIN: We are not willing to overpay, and we do our homework. In the early part of 2000, we were fairly aggressive in technology, and then later in that year we shifted to consumer and health care. Some of our biggest winners in the second quarter of this year were micro-cap companies. We’ve done a good job of identifying companies before Wall Street cozies up to them.

When people ask why we’ve been successful, I like to point to Wayne Gretzky, who said he tries to skate to where the puck will be. You need to be forward looking — we’re always trying to look out the front windshield.

S&P: You’ve also benefited from small-cap growth stocks’ outperformance this year. Do you think that is likely to continue?

BALKIN: Small-cap growth is likely to outperform, but we’re likely to see some correction, although it will probably be a short-term drop in a long-term uptrend.


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