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August 30, 2004 at 08:00 PM
Quick Take: Chris Bonavico, co-manager of Transamerica Premier Growth Opportunities/A (TGOAX), likes high-quality companies with lots of free cash flow. Since they aren’t easy to come by in the small-cap space, the fund focuses on “smid” or small- to mid-cap companies.
Even so, Bonavico and co-manager Ken Broad find there aren’t many companies that meet their criteria. As a result, they run a concentrated portfolio of 20 to 30 stocks with low turnover. To limit volatility, the fund holds only one stock in a sector. The fund’s three-year standard deviation has been less than the average for small-cap growth funds.
The strategy has resulted in competitive performance. For the one-year period through July, the fund was up 18.4%, versus a 9.1% gain for small-cap growth funds. For the three-year period through July, the fund rose 5.5%, annualized, versus a 2.6% loss for its peers.
The Full Interview:
S&P: What is your basic investment philosophy?
BONAVICO: This fund focuses on companies with outstanding franchises among “smid” or small- to mid-cap companies. We follow a smid strategy to avoid the arbitrary small-cap ceilings that force you to sell succeeding businesses.
Our average weighted market cap is $3 billion. We want the very few businesses that can grow into large businesses because of their managements teams, business models, and opportunities. We take concentrated positions, holding about 20 to 30 stocks, with several positions at 5% to 6%.
S&P: What is your approach to growth investing?
BONAVICO: I only focus on businesses that can internally fund their growth since acquisitions are very risky. I also look for companies with favorable long-term trends. We’ll own any business as long as it has long-term secular growth opportunities, rising returns on capital, and good management. We also like companies generating excess cash. Unlike p/e ratios, which many investors follow, free cash flow tells what you, as a business owner, put in your pocket.
S&P: Do you have a difficult time finding growth companies that can fund their own growth?
BONAVICO: We think the common view that growth companies don’t produce excess cash is nonsense. We are especially attracted to companies with growing free cash flows. About 60% of our holdings pay dividends. These companies generate capital appreciation as well as dividend returns.
S&P: With your concentrated approach, how you cope with volatility?
