James Moffett, lead manager of the $148-million UMB Scout Stock Fund (UMBSX), first takes a top-down approach when deciding where to invest. After looking at regional economic and market conditions, he uses a classic bottom-up GARP methodology to find companies that are likely to boost cash flow, among other parameters.
The fund gained 15.4% for the one-year period through November, compared with a 16.4% rise by the average large-cap value portfolio. For the three-year period through November, the fund dropped 3.5%, annualized, versus a 0.5% slide by the peer group.
James A. Reed serves as the fund’s assistant manager.
The Full Interview:
S&P: Are you bottom-up investors?
MOFFETT: No, we start out from the top-down by looking at economic and market conditions. We then decide to overweight or underweight certain sectors relative to the industry allocations in our benchmark, the S&P 500-stock index. However, in no way are we a closet index fund.
S&P: Once you decide on certain sectors, how do pick individual stocks?
MOFFETT: That is a bottom-up process — we pick companies which are likely to increase their earnings, cash flow and dividends. We also evaluate such parameters as five-year historical earnings growth, sales growth, consistency of earnings growth, return on equity, absolute price-to-earnings, and relative price-to-earnings.
We focus entirely on large-cap stocks — as of September 30, the fund’s median market cap was $33.1 billion, compared with $8.0 billion for the S&P 500-stock index.
S&P: Would you describe yourself as growth or value investors?
MOFFETT: We are growth-at-a-reasonable-price investors. Although the screens we use are primarily growth screens, we focus on valuations.
S&P: In October 2003, S&P re-classified this fund as large-cap blend from large-cap value. Do you agree with this re-classification?
MOFFETT: Yes, I think that is an accurate description.
S&P: What are your largest sectors?
MOFFETT: As of September 30, the fund’s largest sectors were information technology, 16% (versus 17% for the S&P 500); health care, 15% (14%); finance, 15% (21%); and consumer discretionary, 10% (11%).
We are currently very bullish about technology and industrial stocks because we’re focusing on the rebounding U.S. economy.
Over the past year, we have significantly added to technology and somewhat trimmed back on health care and consumer staples — industries which are not economically sensitive.
S&P: Do you try to keep your sector allocations fairly close to those of the index?
MOFFETT: We generally try to keep the allocations within 50% of the index weightings.
S&P: What are your largest individual holdings?
MOFFETT: As of September 30: Engelhard Corp (EC), 3%; Mylan Labs (MYL), 3%; Merck & Co (MRK), 3%; PepsiCo Inc. (PEP), 3%; Merrill Lynch (MER), 3%; Best Buy (BBY), 3%; Kimberly-Clark (KMB), 2%; Johnson & Johnson (JNJ), 2%; Weyerhaeuser Co (WY), 2%; and Genentech Inc. (DNA), 2%.
These top ten holdings represented 26% of the fund’s total assets.
S&P: This fund began operations in November 1982, and you took over its management in May 1999. When you became lead manager, did you make any changes?
MOFFETT: Under the prior management, the fund had drifted into the mid-cap deep-value space, which was not what the investment adviser wanted. We then overhauled the portfolio to give it more of a large-cap growth bias.
S&P: How many stocks are in the fund?
MOFFETT: We typically keep a concentrated portfolio of between 50 and 70 names — as of September 30, the fund held 51 stocks. We typically don’t allow any holding to make up more than 4% of total assets.
S&P: What are your sell criteria?
MOFFETT: We are buy and hold investors, who like to hold stocks for the long term, Our annual turnover tends to be under 20%. We like to ride our winners and cut our losers, and we’re aware that valuation is a relative concept.
Thus, instead of price targets, we rely on relative valuations. If we feel a stock is becoming richly priced, we’ll probably trim it, not sell it outright. We’ll sell a holding outright if our investment premise proves to be wrong, or if we discover a more attractive substitute.
S&P: What is the difference between this fund and UMB Scout Stock Select Fund (UMBOX), which you and James Reed also manage?
MOFFETT: The Stock Select Fund is always fully invested, whereas this fund can keep up to 20% of assets in non-equity investments, namely cash. Currently, we have about 11% of the Stock Fund’s assets in cash.
We do this to dampen the fund’s volatility — the Stock Select Fund is designed for more aggressive, less risk-averse investors. Otherwise, the two funds have essentially identical equity holdings.