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August 18, 2004 at 08:00 PM
Aug. 16, 2004 — Funds that invest in growth stocks of large companies often own big makers of brand name drugs.
Don’t look for any in the Constellation Sands Capital Select Growth Fund (PTSGX), though. Two of them left the portfolio not long ago.
As an alternative, portfolio managers Frank Sands Jr. and David E. Levanson have bulked up on biotechnology companies and medical device manufacturers, which together account for about 25% of the fund’s assets that total $97 million. The stockpickers say those are the areas where they’re finding the most innovation in the health care sector, and hence the fastest growth.
For example, in May, the fund invested in Teva Pharmaceutical Industries Ltd. (TEVA), an Israeli biotech company that produces generic drugs. Levanson thinks it can fatten its bottom line by 24%-25% for the “next several years.” Sands expects Teva to benefit down the line as consumers and the health care industry embrace less costly generics.
Another biotech stock, Genentech Inc. (DNA), is one of the fund’s top holdings. The managers say they own the company because, among other things, it produces three leading cancer treatments (Rituxan, Herceptin and Avastin). They expect Genentech to generate earnings growth of more than 25%.
The fund also has stakes in biotech drug makers Allergan Inc. (AGN), Amgen Inc. (AMGN) and Genzyme Corp. (GENZ); and medical device makers Medtronic Inc. (MDT) and Stryker Corp. (SYK).
In May, the managers unloaded Pfizer Inc. (PFE), and a month later they moved out of another big traditional drug maker, Johnson & Johnson (JNJ). Both were disposed of because the managers felt the companies’ revenue and profit growth would slow in coming years.
Sands and Levanson will sell a company whose financial fundamentals appear to be slipping, or if it loses its industry leading position. Stocks with excessive valuations will be banished from the portfolio as well.
Companies that make their way into the fund tend to stick around, however. The managers look to hold stocks for five years or more. Their long-term approach to investing is illustrated by the fund’s turnover rate, which clocked in at 28% last year, compared to 94.5% for the average large-cap growth fund.
Returns for the four-year-old fund, on the other hand, have outpaced its peers lately. The fund was up 5.7% this year through July, versus a loss of 3.1% for its peers. For the one year period ended in July, the Constellation offering gained 15.4%, versus 7.1% for its peers. However, it has assumed more risk, based on its higher volatility rating. The portfolio’s higher beta means that it is more sensitive to changes in the market.
The fund, formerly called the Pitcairn Funds Select Growth (PTSGX), recently joined the Constellation group, which retained the fund’s portfolio managers. The expense ratio for the retail version of the fund, which Pitcairn had capped at 1.15%, has risen to 1.35% under Constellation, but the company expects it to decrease by five to 10 basis points over the next six to eight months as the fund’s assets increase. The average large-cap growth fund charges 1.52%.
