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October 28, 2004 at 08:00 PM
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.
