Quick Take:Steve Neimeth took over managing the SunAmerica Value Fund (SSVAX) in late August 2004, when AIG SunAmerica Asset Management replaced American Century as the fund’s investment adviser. Neimeth shifted the portfolio from a mid-cap style to a higher-quality, large-cap orientation which he felt would outperform as interest rates rise.
This year through October, the fund gained 7.3%, while its large-cap value peers returned 4.3%. For the three-year period through last month, the fund rose 10.4%, annualized, versus a 5.4% gain by its peers.
The Full Interview
S&P: What changes did you make in the fund when you became manager?
NEIMETH: We decided to emphasize higher-quality, large-cap companies since interest rates are likely to rise for the next two or three years . We boosted the fund’s average market cap to $100 billion from about $23 billion. We overhauled about 75% of the fund by unloading several mid-cap stocks.
S&P: What is the investment philosophy behind this fund? What are your specific buy criteria?
NEIMETH: Our stock-picking is strictly bottom-up. We buy companies that are trading at a P/E below the market’s average multiple, but with an earnings/revenue growth rate that is equal to or above the market average.
We evaluate a company’s intrinsic value based on its balance sheet, cash flow and accounting. We like stocks with low debt-to-capitalization ratios, high free cash flows, and clean accounting.
S&P: What are your largest holdings?
NEIMETH: As of October 30: General Electric (GE), 5.0%; ChevronTexaco Corp. (CVX), 4.2%; Exxon Mobil (XOM), 4.1%; Bank of America (BAC), 4.1%; Citigroup Inc. (C), 3.7%; American Express (AXP), 3.0%; J.P. Morgan Chase & Co. (JPM), 2.5%; United Technologies (UTX), 2.3%; Marathon Oil (MRO), 2.2%; and Limited Brands (LTD), 2.2%.
These ten holdings represent 33.3% of total assets. We typically hold between 45 to 55 stocks, and currently have 51 holdings.
S&P: Can you discuss two recent purchases?
NEIMETH: Limited Brands, which has performed very well this year, is a women’s intimate apparel and personal care products retailer that we bought at about $20 per share just after we took over the fund. The stock did not look that inexpensive, as it was trading at a P/E of 16, similar to the market multiple, but Wall Street didn’t seem to recognize the company’s strong balance sheet. Limited Brands had $4 per share in cash on the balance sheet and was generating $500 million annually in free cash flow, representing a 5% yield on the market capitalization.
In addition, the company was returning cash to shareholders. They bought back $1 billion in stock through a Dutch tender offer in March 2004, and plan to repurchase $2 billion this year, for a total buyback of about 30% of shares outstanding.