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Fund in Focus: Enterprise Equity Income Fund

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Aug. 31, 2004 — Subjective judgments don’t always result in the best investments, according to the managers of Enterprise Equity Income Fund/A (ENGIX). A quantitative approach to stock valuation and momentum “helps minimize the subjectivity that we bring to the table,” says Michael Vogelzang, the fund’s lead manager.

With an investment process that is about 75% to 80% quantitative, Vogelzang and co-managers Tim Woolston and Doug Riley start by looking for stocks with dividend yields greater than that of the S&P 500-stock index.

The managers recognize that screening for stocks with low valuations as well as momentum can seem at odds, since value stocks are not typically regarded as having the momentum characteristics associated with growth stocks. As a result, their screens can be at odds, but “that is intentional,” says Woolston.

Since the fund considers stocks with market caps of $1 billion and up, the managers are glad that their criteria help narrow down their potential universe. As value stocks are often cheaply priced for a reason, screening for momentum can uncover stocks with upside potential. The momentum characteristics the $133-million fund looks for include a catalyst or a turnaround in business fundamentals. The end result is a portfolio of about 85 stock holdings.

Since taking over from the fund’s previous manager, John Rock, Vogelzang says the biggest change in the portfolio was a cut in its health-care weighting to under 3% from over 20%, as well as the sale of all of its Baby Bell holdings.

The fund’s largest sectors are currently financials, energy, and consumer discretionary. Although large, the fund’s financial stake is underweight its benchmark, the Russell 1000 Value index. In financials, the fund favors life insurance companies because of their stable earnings. Lincoln National Corp. (LNC) was a key insurance holding at the end of May.

The managers say they now see opportunities in the energy sector. Since many Wall Street estimates for energy company earnings were based on $30 a barrel oil, higher oil prices are now boosting earnings for many energy companies. In the sector, the fund has recently purchased Unocal Corp. (UCL) and Kerr-McGee (KMD) .

Vogelzang and his team have produced solid returns since they’ve starting running the fund. For the one-year period through last month, the fund is up 23.8%, compared with a 14.9% gain for the average large-cap value fund. For the three-year period through July, the fund rose 2.5%, on average, versus a 0.4% increase for it peers.

As of May 31 2004, the fund’s largest holdings included Reuters Group (RTRSY), Limited Brands (LTD), and Citigroup Inc. (C) . The managers like Reuters because new management is turning around a “hidebound” company.

The managers say they are seeing a slowdown in earnings momentum in the overall market, but by ranking stocks relatively they can monitor holdings that may be losing momentum. Holdings generally become sell candidates when their overall ranking falls, or if they become too large of a position.

Going forward, the managers are optimistic about their focus on dividends, believing this year’s weak market undervalues earnings gains fueled by economic growth.

Contact Bob Keane with questions or comments at [email protected].