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May 05, 2004 at 08:00 PM
May 4, 2004 — After suffering double-digit losses in 2001 and 2002, the Evergreen Strategic Growth Fund/A (ESGAX) rebounded last year, returning 28.5% as the climate for large-cap growth stocks improved with a stronger economy and better fundamentals.
For the one-year period through March 31, the fund kept pace with its large-cap growth peers, gaining 29.1%, versus 31.2% for the group. Though the fund’s A shares have a short track record, its institutional share class lost an average annualized 0.8% for the three years ended in March, versus a loss of 2.7% for the average large-cap growth fund.
In April 2000, the fund invited Jay Zelko to the management team. W. Shannon Reid serves as lead portfolio manager, and Zelko and David Chow are on board as co-managers.
“We look for stocks with a history of earnings growth, strong fundamentals and rising earnings expectations,” said Zelko. The team picks stocks purely from the bottom up and eschews macroeconomics completely. However, the managers like to be within 80% and 120% of the corresponding weightings of the major sectors in their benchmark, the Russell 1000 Growth Index.
As of March 31, 2004, the fund’s top five sectors were information technology, 25.8%; health care, 19.5%; consumer discretionary, 14.7%; industrials, 12.5%; and financials, 10.5%. “Although information technology and health care are our top two sectors, they actually represent an underweighting relative to the benchmark,” noted Zelko.
While the portfolio is actively managed, the team keeps a close eye on the constituents of the benchmark. As of March 31, the fund’s top holdings were Pfizer Inc. (PFE), 4.9%; Intel Corp. (INTC), 4.9%; General Electric (GE), 4.2%; Cisco Systems (CSCO), 2.9%; Electronic Arts (ERTS), 2.6%; Microsoft Corp. (MSFT), 2.5%; PepsiCo Inc. (PEP), 2.3%; Procter & Gamble (PG), 2.2%; Texas Instruments (TXN), 2.2%; and EMC Corp. (EMC), 2.1%. The portfolio typically holds between 50 and 70 stocks, and is currently at the upper end of that range.
Although the fund’s top stocks include tech blue chips such as Cisco, Intel and Microsoft, Zelko has been trimming back on technology since last year. Microsoft, for example, represents a significant underweight relative to the benchmark, he noted.
“Microsoft has become a victim of its own success,” said Zelko. “They still dominate desktop computing and enterprising software, but they won’t be able to repeat their historic growth rates.” On the plus side, Zelko notes that Microsoft remains “a very profitable company that generates high cash flow, and also has the opportunity to lower its cost structure and increase operating margins.” He believes these qualities warrant having a position in the stock.
