The Putnam Vista Fund/A (PVISX) is managed by a former fundamental research analyst and a former quantitative analyst. As a result, stock picking in this $2.8-billion portfolio reflects both investment methodologies.
Kevin Divney, the ex-quantitative research analyst, identifies “inefficiencies” in the equity markets that can be exploited. “Essentially, we look for growth and combine that with a heavy emphasis on quality and valuation,” he said.
Divney and his partner, Paul Marrkand, the former fundamental research analyst, have managed the portfolio since July 2003.
Divney acknowledges there are strengths and weaknesses to both approaches — fundamental and quant — “but if you leverage both methods and integrate, you will likely generate more consistent out-performance over time,” he asserts.
For the one-year period ended May 31, 2005, the fund gained 12.9%, versus 8.1% for the average mid-cap growth portfolio. For the three-year period, the fund registering an average annualized return of 6.5%, versus 6.0% for its peers. However, those results were achieved with greater volatility.
As co-chief investment officers of Putnam’s mid-cap growth team, Divney and Marrkand oversee a total of $8.5 billion in assets, including institutional products. Divney and Marrkand also co-manage the Putnam New Opportunities Fund/A (PNOPX), also ranked 3 Stars by Standard & Poor’s.
“A lot of growth investors don’t focus on quality and valuation,” Divney noted. “It’s very difficult to assign a valuation target on a company that is growing swiftly, because there are many uncertainties, and, consequently, a high degree of error in making forecasts. We balance our desire for high growth, with attractive valuations and quality management and business models.”
The fund invests in mid-cap companies across an array of industries. Typically, stocks in the portfolio are relatively well-established, but continue to provide high annual growth and earnings visibility. Divney and Marrkand have a universe of about 1400 stocks to select from, with market caps between $1 billion and $10 billion. They will, however, go above or beneath that range as long as a company remains an attractive investment.
As of May 31, 2005, the fund’s top ten holdings were Linear Technology Corp. (LLTC), Citrix Systems Inc. (CTXS), Claire Stores Inc. (CLE), United Defense Industries (UDI), C. R. Bard Inc. (BCR), Veritas Software Corp. (VRTS), Bear Stearns Cos. (BSC), Varian Medical Systems Inc. (VAR), Wellpoint Inc. (WLP) and Sandisk Corp. (SNDK). These represented 19.82% of the portfolio’s assets. The fund currently holds 107 stocks, but typically keeps about 90 positions.
As of May 31, 2005, the top sectors in the portfolio were technology, 28.0%; healthcare, 19.0%; consumer cyclicals, 16.5%; financials, 9.2%; capital goods, 8.0%; and consumer staples, 7.7%.
While the stock-picking process is strictly bottom-up, the fund seeks to closely match the sector weighting of its benchmark over the long term to control risk, the Russell Mid-Cap Growth Index. As a result, Divney explained, the top ten holdings don’t necessarily represent the managers’ favorite picks.
Technology, health care and consumer cyclicals, Divney said, will always dominate the fund, since these sectors tend to be well represented in the mid-cap space. As a result, Divney, Marrkand and their team of analysts spend most of their time researching these three industries.
Within the tech sector, the fund has consistently kept an overweight position in software. Divney said companies in this sub-sector tend to enjoy strong operating leverage and margins that can expand as they grow.
One of his favorite is Adobe Software (ADBE), known for its Acrobat downloading product. “This company will continue to grow; their proprietary products are entrenched and have become the standard,” Divney said. “Aside from Acrobat, they also have Illustrator, Photoshop and Premiere, among others. Adobe has also competed against Microsoft (MSFT) successfully.”
Divney also likes McAfee Inc. (MFE), the anti-virus software firm, as well as Symantec Corp (SYMC), which is about to merge with Veritas Software. “We think the proposed merger with Veritas is strategically sound, although the market has not yet fully appreciated its value,” Divney commented. The managers are currently underweight in semiconductor stocks, although the fund’s top holding, Linear Technology, is in this space.
“The semiconductor industry has such a cyclical nature that it makes it hard to predict future growth trends,” Divney said. “Moreover, this sector seems to be too much influenced by investor sentiment.” However, he added that Linear Technology is “more diversified than its competitors, and their returns-on-capital have been attractive relative to peers.”
The fund currently has a neutral weighting in the health care sector. Here, Divney has been overweight in managed care, including Wellpoint and PacifiCare Health Systems (PHS). “Some of our analysts believe managed care stocks are overvalued and they’re worried about potential regulatory risks, as well as a consolidation process in the industry,” he said. “However, one thing that distinguishes the managed care industry is that it has robust pricing power. The possible impact of regulatory risks have not occurred yet.”
Also within health care, Divney likes the “boring” medical devices sector, including stocks of companies such as CR Bard and Dade Behring Holdings Inc (DADE). “These companies have very visible earnings streams, they’re gaining market share; and they possess good economies of scale,” he noted.
Some of Divney’s favorite holdings actually represent small percentages of the fund’s assets, reflecting underlying risks. He cites XM Satellite Radio Holdings Inc. (XMSR), a relatively new company that provides music, entertainment, and other types of programming that customers can receive in their cars, trucks, home, portable radios, or over the Internet. “XM Satellite won’t be in our top ten because it’s too risky, but it’s an exciting company,” he said. “It could turn out to be what cable TV was in the 1970s.”
The fund’s annual turnover rate, 78.0%, falls below the peer group’s average. The managers typically do small trades in and out of positions. “We trim back, rather than make outright dispositions, Divney said. “Very rarely would we make an outright disposition.”
Contact Bob Keane with questions or comments at: .