Fund in Focus: AXP Equity Select Fund

March 3, 2005 — As a growth manager, San Diego-based Duncan Evered admits he invests less aggressively than others might. That’s because he sees investors in AXP Equity Select Fund/A (INVPX) as people who are saving for retirement and need to preserve and build capital. While aggressive enough to invest in a growth fund, these clients “certainly don’t want to lose principal,” he said.

Like the climate of his host city, Evered’s fund doesn’t run to extremes. It tends to lag its peers in both gains and losses. For instance, for the one-year period ended Jan. 31, 2005, the fund rose 2.5%, versus a gain of 6.7% for its mid-cap growth peers. Over three years, it registered an annualized gain of 4.1%, beating its peers, which returned 3.6%. The results were achieved with less volatility.

Evered’s style is less than “laid back” when it comes to researching and monitoring his investments. As sole manager of the fund, he draws on the expertise of six industry analysts who contribute to other AXP growth funds, a quantitative analyst, and a trader, all based in San Diego. He says his “hands-on, research-intensive process” seeks to identify firms with market capitalizations between $1 to $8 billion that can grow earnings at 15% a year at a sustained rate, and that have “the wherewithal to become significant entities.”

Evered, who has managed the fund since February 2000, just prior to the stock market’s peak, describes his approach as bottom-up and research driven, the most important aspects of which are interviewing company management, reviewing 10K and 10Q reports, and analyzing competitive landscapes. He attends trade shows, visits companies, and talks to their customers and vendors to obtain information.

Evered seeks stocks of companies with sustainable earnings growth over two to three years. He looks for durability and defensibility in a firm’s relationships with its customers, and for recurring, consistent results on the income statement and balance sheet. The income statement should indicate the company’s “special, unique, and differentiated” status — i.e. evidence that a particular company is the one “you’d rather not be competing against” if you were in that industry.

Evered cites Coach Inc (COH), Chico`s FAS (CHS), and Starbucks Corp (SBUX) as examples such companies in the consumer discretionary area; and Paychex Inc (PAYX) and Fiserv Inc (FISV) in the business services sector. The manager is particularly interested in the latter “applied technology” companies for the way they have adopted information technology to business purposes. Paychex represented 2.2% of fund assets as of December 31.

Another star performer in the fund is Whole Foods Market (WFMI) — the top holding in the portfolio at 3.7% of assets. It’s the “largest company in the fastest growing segment of the grocery story industry,” Evered said. He adds that while one might not think of this industry as a place to invest for growth funds, this company is a good bet. “They operate about 160 stores and have 30-plus stores in the pipeline,” he noted. The company is “responsive to consumer tastes and has superior merchandising skills.”

Holding 60 to 80 positions at any given time, AXP Equity Select has a bias toward concentration. After Whole Foods, top holdings as of December 31 were Fastenal Co (FAST), an industrial and construction supply distributor, 3.2%; Starbucks, 3.0%; Biogen Idec (BIIB), a biopharmaceutical company focused on treatments for cancer and autoimmune diseases, 2.9%; and Diagnostic Products (DP), a manufacturer of immunodiagnostic systems and kits, 2.9%.

Evered likes to buy into a company when its capitalization is in the “low billions of dollars,” and to sell it in the high teens or low twenties. However, if a company exceeds the fund’s market-cap range, Evered is not obligated to sell it, as is the case with Starbucks. “But anything over $10 billion gets additional scrutiny,” he said. The fund’s turnover is generally low, making tax efficiency a priority.