Quick Take: By using a thorough quantitative screening model to rank and sort stocks before analyzing their fundamentals, co-managers Louis G. Navellier and Shawn Price of the Touchstone Large-Cap Growth Fund/A (TEQAX) have built a concentrated portfolio of large-cap companies they believe will outperform the overall stock market. Of paramount importance to the managers is risk control: Overly volatile stocks, no matter how good the underlying picture, are often booted from the portfolio.
The strict methodology had produced stellar returns. The $304-million fund gained 12.8% for the year ending January 31, 2005, versus a gain of just 2.2% for the average large-cap growth fund. For the three-year period, the fund returned 5.2%, versus a decline of 0.4% for the peer group. Over five years, the fund slipped 3.5%, but that still beat its peers, which dropped 7.0%.
Price has co-managed the product since its inception in December 1997. The portfolio is ranked 5 Stars by Standard & Poor’s.
The Full Interview:
S&P: Describe your stock selection process for this fund.
PRICE: We seek to maximize returns while minimizing risk by investing in large-cap growth companies we think have strong risk-reward characteristics. To find stocks for the portfolio, we use a three-step process. We begin with a universe of domestic stocks with a minimum of $10-billion market cap (at the moment, this universe represents about 435 names).
Every week, we screen this batch using a quantitative method to identify inefficiently priced companies; i.e. stocks that are outperforming the overall market and possess, among other things, strong earnings growth, expanding profit margins and high free cash flow. Then, we calculate standard deviation to weed out stocks that are too volatile. After that, we examine the stocks’ underlying fundamentals to understand why they are outperforming. By now, we have whittled our universe down to about 50 names. From this group, we construct a portfolio of between 35 and 40 stocks that are nicely diversified by sector.
S&P: What limits do you impose on the portfolio?
PRICE: We don’t allow any individual holding to occupy more than 5% of the fund’s total assets. We typically take an initial position of 1.5% to 2% in our stocks.
In addition, we usually don’t take any big sector bets relative to our benchmark, the Russell 1000 Growth Index, although we don’t place any limits in that respect.
S&P: What are your largest holdings?
PRICE: As of Feb. 28, 2005: Burlington Northern Santa Fe (BNI), 4.1%; Aetna Inc. (AET), 3.9%; Encana Corp. (ECA), 3.8%; Dell Inc. (DELL), 3.8%; Becton Dickinson & Co. (BDX), 3.7%; Hershey Foods Corp. (HSY), 3.6%; Apple Computer Inc. (AAPL), 3.6%; Infosys Technologies (INFY), 3.6% ; America Movil S.A. (AMX), 3.5%; and Mobile Telesystems (MBT), 3.4%.
S&P: What are your top sectors?
PRICE: As of Feb. 28, 2005:information technology, 21.4%: energy, 17.8%; health care, 16.7%; consumer discretionary, 12.3%; consumer staples, 11.2%; telecommunications, 8.8%; industrials, 6.3%; financials, 3.4%; and materials, 2.1%.
Relative to the benchmark, we are currently overweight in energy, while the other allocations are pretty close to equal-weightings.