Feb. 19, 2004 — The American Century Stgc Alloc Aggressive/Inv (TWSAX) can invest in companies anywhere, but right now those abroad are particularly appealing to lead manager Jeff Tyler.
That group takes in emerging markets, too, because Tyler and his team reason that if the U.S. economy grows, developing countries will grow faster.
“We think the offshore markets are more fairly valued than the U.S.,” Tyler added in a recent interview. International stocks have also gotten a boost from gains in foreign currencies relative to the U.S. dollar, he noted.
The fund has 21% of its $717 million in total assets in foreign stocks, of which about 8% are in emerging markets. Tyler named Samsung Electronics Co. as a typical holding in the group. The Korean manufacturer of semiconductors and consumer electronics products has “good growth opportunities,” thanks to the revival of economies around the globe, he said.
Another example of the fund’s investments in the third world is Grupo Mexico SA de CV, a Mexican mining company Tyler sees benefitting as prices rise for certain metals.
Among emerging markets, Tyler said he likes Eastern Europe and Asia. Both are drawing manufacturing jobs from other parts of the world, in part because of their large, highly educated work forces, he said.
Over all, stocks now account for 80% of the fund’s assets, 2% more than their typical allocation, and 18% is in bonds, 2% less than normal, Tyler said. Cash holdings have held steady at 2%.
The fund’s mix of investments added up to a total return of 27.8% in 2003. That put it slightly behind its large-cap growth fund peers, which gained 28.1%, and the S&P 500, which rose 28.7%. Over the last few years, however, American Century Strategic Allocation Aggressive has topped both. It returned an average annualized 5.4%, versus a loss of 2.8% for similar funds, for the five years ended in December. The index slipped 0.6% during that period.
Because of its mix of assets, the American Century fund’s returns tend to be less volatile and sensitive to market moves than similar funds, serving as a cushion. That is illustrated by some statistics on the portfolio.
The American Century fund has an beta reading of 0.66, versus 1.09 for its peers. (Beta gauges how sensitive a fund is to changes in the market. A beta of 2.00 means the fund moved twice as much as the market.)
American Century Strategic Allocation Aggressive’s standard deviation reading for the three years ended in January is 12.45 , versus 21.25 for its peers. (Standard deviation is an historical measure of the variability of a fund’s returns. The lower the reading, the lower the fund’s volatility.)
At the end of 2003, the companies in Tyler’s portfolio sported a market capitalization of about $54 billion, on average. Mid-sized companies are also welcome in the portfolio, which blends growth stocks and undervalued equities.
The fund’s fixed-income securities are divided between high and low quality bonds, with the latter usually making up 3%-4% of its assets. Intermediate to long-term corporate bonds, mortgage-backed securities and Treasuries are all part of the mix.
Asset allocation for the fund is determined with several computer models, which compare historical returns of stocks, bonds and cash, and also measure volatility.
Of American Century’s three Strategic Allocation offerings, the Aggressive fund tends to be “more interested in growth-oriented stocks,” said Tyler, who heads the management teams that oversee all the portfolios. In this group of equities, the fund looks for companies with accelerating profits and sales that appear capable of sustaining that forward momentum. Expanding margins and large or leading market shares are other desirable corporate characteristics.
In addition to company-specific numbers in picking stocks, Tyler also considers economic factors, like interest rates and consumer buying patterns.
The Aggressive fund may hold as many as 350-400 stocks, according to Tyler. Currently, Cisco Systems (CSCO), which makes equipment for linking computer networks, and computer maker Intl Bus. Machines (IBM), held the No. 1 and 2 positions in the portfolio at the end of January. Both stand to gain if companies continue to increase spending on information technology, Tyler said.
Medical equipment maker Boston Scientific (BSX) held third place in the fund. “Their market share in stents is looking extremely good,” Tyler said of devices produced by the company that are used to prop open arteries.
Rounding out the fund’s top five stocks last month were financial services giant Citigroup Inc (C), and Genl Electric (GE), a conglomerate whose operations range from aircraft engine production to broadcasting. Diverse businesses make both companies look good, because one business can pick up the slack for another that may be lagging, Tyler said. In addition, both stocks feature attractive valuations, he said.
When it comes to selling, the fund will trim a holding, or sell it outright, if a company’s financial fundamentals erode, or the stock’s valuation becomes expensive.
Share price appreciation recently led the fund to scale back its stakes in software maker Microsoft Corp (MSFT) and semiconductor producer Intel Corp (INTC), but both remain among the fund’s biggest holdings, Tyler said.
The rally in domestic stocks over the last few months has led the fund to cut its equity allocation slightly, Tyler said. “I think the market’s priced in a continued strong economic performance, and as such, extraordinary returns have been made,” he said.
Tyler said he envisions U.S. stocks returning about 10% this year. That’s based on his assumption that P/E multiples will be essentially flat, while corporate revenues will increase about 10%-12%.
The portfolio manager doesn’t see the U.S. bond market moving far in either direction since he believes it unlikely that the Federal Reserve will raise interest rates. Still, Tyler thinks the difference in yields among short, intermediate and long-term bonds will begin to increase this year, feels short-term fixed-income securities will be the best performers as a result.
– Richard Diennor