Quick Take: Donald Baxter, who manages the Philadelphia Fund (PHILX), considers it a growth and income fund. Consequently, he holds bonds as well as stocks, and favors dividend-paying companies for the equity portion of the portfolio.
Stocks currently make up nearly 81% of the $80-million fund. In hunting for equities, Baxter scans for undervalued shares of profitable companies that churn out cash. He concentrates the portfolio on about 25 large companies.
Baxter’s fund topped all its peers through the end of July this year, returning 7.8%, versus 1.0% for the average large-cap value fund. The Philadelphia Fund has also stayed ahead of similar funds for the three years ended last month. It gained 3.8% on average during that period, versus 0.4% for its peers.
The Full Interview:
Not many companies make their way into the Philadelphia Fund. That’s partly because not many have what it takes to gain entrance, says Donald Baxter. He has managed the portfolio for more than 17 years.
Baxter, who also holds bonds and cash, typically focuses the equity portion of the fund on about 25 large companies. That provides adequate diversity, facilitates research, and enables each stock to make to meaningful contributions to performance, he believes. Adding more stocks wouldn’t reduce risk, and would weigh on returns, pulling them closer to average, he maintains.
“Surprisingly, there is not a large number of stocks that meet” his investment criteria, Baxter adds.
Baxter looks for profitable businesses that generate cash, and whose shares are priced low relative to things like the company’s earnings, sales or book value.
To help generate income for shareholders, he leans towards companies that pay hefty dividends. He also likes to see high percentages of returns on equity and large or leading market shares.
In addition to assessing a company’s financial attributes, Baxter keeps an eye out for those in position to benefit from economic or demographic trends.