Quick Take: Despite its name, the Thompson Plumb Growth Fund (THPGX) is actually a blend fund. Lead manager John C. Thompson wants to buy companies that are consistently growing earnings and revenues, regardless of whether they are growth or value stocks. Thompson likes to keep a concentrated portfolio — usually under 75 holdings — with big stakes in his top stocks.
The $1.4 billion fund has beaten its large-cap blend peers in recent years. For the 12 months through July, the portfolio rose 13.6%, versus a 11.7% return for its peers. For the three-year period through July, the fund climbed 3.9%, on average, while the peer group dropped 2.0%. For the five-year period through July, the variance is even greater — the fund gained 10.1%, on average, while its peers lost 2.0%.
The fund is more volatile than its peers as illustrated by its significantly higher standard deviation, 22.60 versus 16.45, though the fund’s expense ratio is lower, 1.07% versus 1.15%.
Thompson joined the fund’s management team in 1994. His father, John W. Thompson, founded the portfolio in February 1992.
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The Full Interview:
S&P: What kinds of stocks do you look for?
THOMPSON: We invest in stocks with at least $1 billion in market cap. We use a strictly bottom-up process to identify companies with top- and bottom-line growth, strong balance sheets, significantly lower price-to-earnings and price-to-sales ratios than their ten- or 20-year averages, and annual returns-on-equity of at least 15%.
We invest in both growth and value stocks, as value stocks often show good growth characteristics. For example, Federal Home Loan Mortgage Corp. (FRE), one of our top holdings is clearly a value stock, but try to find a company that has grown as much as they have over the past twenty years.
We emphasize valuations. While we don’t stick to absolute quantitative parameters, we rarely hold a stock trading at a P/E of more 30. Based on 2005 earnings estimates, the fund currently has an average P/E of about 13.9.
The fund’s average market cap is currently about $45 billion, up from about $7 billion in early 2000.
We avoid stocks undergoing significant turmoil or facing little top-line or bottom-line growth.
S&P: Do you meet with company management?
THOMPSON: No, we do strictly in-house research. Our investment approach is based on valuations, so we don’t find it productive to visit company facilities and management. We think that maintaining a proper distance gives us more objectivity.
S&P: What are your largest holdings?
THOMPSON: As of June 30, our ten top stocks were Federal National Mortgage (FNM), 7.9%; Microsoft Corp. (MSFT), 5.9%; First Data Corp. (FDC), 5.7%; Freddie Mac, 5.2%; Pfizer Inc. (PFE), 5.0%; Viacom Inc. (VIA.B), 5.0%; Johnson & Johnson (JNJ), 3.5%; Tyco International (TYC), 3.4%; Cardinal Health (CAH), 3.0%; and Time Warner (TWX), 2.9%.
These top ten stocks make up almost 48% of the fund’s assets.
The fund currently has 61 stocks, and we typically range between 45 and 70 holdings. We don’t think it’s possible to beat the S&P 500-stock index if you own hundreds of stocks.
S&P: You make big bets on your top stocks. Is that risky?
THOMPSON: We define risk as having a good chance to lose money. We keep a concentrated portfolio of very strong ideas. In weak markets, a concentrated fund has much lower risk than a diversified portfolio.
S&P: Your largest position, Fannie Mae, has been volatile this year, though it is up year-to-date.