Fund in Focus: Salomon Brothers Capital

March 12, 2004 — Yes, Salomon Brothers Srs Fds:Capital/A (SCCAX) had a “terrific” year in 2003, says Robert Donahue Jr., one of its portfolio managers. To be fair, though, he points out that the fund had some catching up to do.

The $1.6-billion portfolio lost 24.6% in 2002, trailing its large-cap value fund peers, which fell 20.1%, and the Standard & Poor’s 500-stock index, which was off 22.1%.

The fund encountered most of its problems between June and September, and excluding those months, the rest of the year “wasn’t necessarily so bad,” Donahue says. But during that stretch, all types of stocks “went down quite precipitously.” So even though Salomon Brothers Capital held a diverse group, there was nothing to cushion the fall.

Still, the fund’s decline was the only one it has suffered since 1997, and it bounced back nicely last year, rising 43.8%, versus 28.7% for similar funds, and 28.5% for the S&P 500. Salomon Brothers Capital returned 12.4% on average for the five years ended last month. By comparison, its peers were up 4.2% during that span, and the index edged down 0.1%.

In overseeing the fund, Donahue says he and Ross Margolies invest in “a mix of a lot of different things.” The blend incorporates undervalued and growth stocks of companies in all industries and of just about any size, except those with market caps of less than $1 billion. The managers also stash part of the fund’s assets in cash, and sometimes keep a bit in bonds.

For the growth component of the portfolio, the managers and their team of analysts look for companies whose earnings and sales are increasing, and that have large or dominant market shares.

“What we really focus on, on the growth side,” Donahue says, “is finding business models that really make sense, that are understandable, and that are sustainable for an extended period of time.”

When hunting for value stocks, the team keeps an eye out for a catalyst, like a new product, or a management change, that can boost share valuations.

“If you look at the performance of the fund over time, the big, big winners have been companies that we bought at a value price but that turned out to be growth stocks,” Donahue says.

One of the fund’s investments that is currently traveling from the value camp to growth territory is News Corp Ltd ADS (NWS), the Australian media and entertainment giant.

“This is a company that has historically traded at a discount to its peers,” Donahue says of the firm, whose businesses range from television broadcasting to publishing and movies. The stock has been in the fund since 1998 and ranked eighth in the portfolio at the end of last month.