Quick Take: Faced with the growth and value areas of the market going in or out of favor, a blend strategy often yields the best long-term results, says Matti von Turk, manager of American Century Small Company/Inv (ASQIX). When markets inevitably overreact, von Turk believes such a strategy can take advantage of the resulting market inefficiencies and anomalies.
To further dampen market volatility, von Turk uses a quantitative investment approach, focusing on earnings acceleration, price momentum, and valuations. Also to reduce volatility, von Turks selects a broad number of holdings, ranging from 200 to 300 stocks.
Von Turk’s approach has succeeded during this year’s rally as well as during the recent bear market. This year through September, the fund rose 29.5%, versus a 26.5% gain for the average small-cap blend fund. For the five-year period through last month, the fund was up 12.9%, on average, compared with a 9.8% rise for the peer group.
The Full Interview:
S&P: What is your basic investment philosophy?
VON TURK: We look to exploit inefficiencies and anomalies in the market using a multi-factor quantitative strategy. We strive for a balanced stock ranking model that is style neutral. Our stock-ranking model balances measures of value and growth. When evaluating stocks, we consider earnings acceleration, price momentum, and valuations.
S&P: Is the fund currently tilted more toward value or growth?
VON TURK: Our approach gives us equal weightings of growth and value. We build the portfolio based on an unbiased and stable view of the world. Sometimes, momentum or value is in favor, but we stick with a rational view of the market. Then, as investor attitudes shift, we’re able to recognize pockets of value as they occur.
S&P: Is the fund over or underweight in any sectors as a result of your process?
VON TURK: We have some slight industry and sector weights, but they’re strictly an outgrowth of our stock selection process. Our biggest underweights are stocks in our benchmark, the S&P SmallCap 600-stock index. Our picks from outside the benchmark are where we find the most value, the most bang for the buck.
S&P: What are the fund’s largest sectors?
VON TURK: Technology, consumer cyclicals, financials, and health care. Our weightings are within 2% of the benchmark. Technology is our biggest underweight relative to the benchmark.
S&P: Has your process uncovered any broad economic trends?
VON TURK: The home building trend. The stock ranking model has favored home builders, title insurance companies, banks, and thrifts that are involved in home building loans. Holdings in these areas include Fidelity Natl Finl (FNF), First American (FAF), and Ryland Group (RYL).
S&P: How many holdings does the fund typically have?
VON TURK: About 200 to 300 names. We make a lot of little bets. We feel we’re good stock pickers, but you’re usually better off spreading your bets across many holdings.
S&P: Why has the fund had strong performance in recent years?
VON TURK: Our technology holdings helped us — more than 1.5% of our outperformance came from the technology sector. Our tech allocation was flat relative to the index, but we picked the right stocks. We are also slightly overweight in basic materials. One of our largest holdings, United Stationers (USTR), also helped returns.
S&P: Why has your longer-term performance been strong?
VON TURK: Our industry neutral approach keeps us from being dragged down more than the benchmark. We’ve also benefited from holdings outside our benchmark.