Oct. 27, 2004 — Looking for “high-quality, good franchises,” managers David Lettenberger and Nancy Barber are not momentum investors. The two follow a strict price discipline in selecting holdings for First American Mid-Cap Growth Opportunities/A (FRSLX).

That discipline is central to the fund’s “cautious” approach to growth investing, according to Lettenberger. Along with looking for stocks likely to outperform regardless of the economic cycle, the managers will forgo some gains rather than try to capture a stock’s maximum potential. “We might not catch the huge moves after a stock reaches full valuation,” Lettenberger says.

To help Illustrate the flipside of their watchful approach, Lettenberger said the fund sold two-thirds of its position in Chiron Corp. (CHIR) about three weeks ago when the company first said its flu vaccines may be contaminated. The fund then sold the rest of the position when the company confirmed the news. “It is hard to get stocks right, but you can make up ground by avoiding blow-ups,” Lettenberger says.

Historically, First American Mid-Cap Growth Opportunities had been less volatile than its peers. The three-year standard deviation on the portfolio is lower than the average mid-cap growth fund, 17.57 vs. 20.45. Standard & Poor’s has classified the portfolio’s three-year risk rank as “moderate,” relative to domestic equity funds overall.

The $1.4-billion fund looks for stocks with above-average sustainable growth based on earnings and the quality of balance sheets. Lettenberger and Barber took over the portfolio in May 2003.

Along with bottom-up fundamental analysis, the fund’s investment process includes top-down consideration of promising sector trends. “We start our search at a company specific level, but we also like to have a top-down theme,” Barber says.

One top-down theme in the portfolio is government legislation mandating electronic processing of checks. This change led the fund to NCR Corp. (NCR), which provides infrastructure for banks.

The fund’s turnover is currently over 100%. The managers note that the rate results from changes they’ve made to the portfolio since they took over. Going forward, they expect lower turnover.

Barber and Lettenberger have up held the fund’s record of outperformance. For the one-year period through last month, the portfolio was up 16.9%, versus an 11.2% gain for its mid-cap growth fund peers. For the five-year period through last month, the fund rose 12.0%, on average, while its peers were flat.

These days, the fund’s largest sectors now include technology (28%), health care (20%), and energy (8%), all overweightings relative to its benchmark, the Russell Midcap Growth Index. The overweightings could spell increased volatility going forward than the fund has historically exhibited.

The fund’s large position in technology is a result of attractive valuations, rather than a top-down view of the sector, Barber says. The 28% technology weighting includes a 7% stake in NCR, and a 3% position in Research in Motion (RIMM), which looks attractive because of likely growth for wireless data services for businesses and individuals over the next several years, the managers say. The fund also holds Apple Computer (AAPL) on optimistic forecasts for several its new products.

As of September 30, the fund’s largest holdings include NCR Corp., Research in Motion, Bunge Ltd. (BG), PerkinElmer Inc. (PKI), and Aetna Inc. (AET). Bunge is a somewhat unusual holding. The Dutch agribusiness company has a promising outlook, according to Lettenberger, because of potentially high worldwide demand for soybeans, a key product line for the company.

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.