Quick Take: When does a growth fund qualify as a low-risk investment? When it’s actually a blended portfolio combining both growth and value-oriented stocks. The $2.6-billion Oppenheimer Equity Fund/A (OEQAX) draws primarily from both the Russell 1000 Growth and Russell 1000 Value Indexes for its universe of investible equities. Co-manager David Poiesz is in charge of the fund’s growth holdings, while lead manager Chris Leavy oversees the value side.
For the year ended August 31, the fund returned 18.6%, versus a 13.7% gain by the average large-cap growth fund, and a 12.6% rise by the S&P 500 Index. Over three years, the fund recorded an annualized return of 12.7%, versus 10.1% for the peer group and 12.0% for the Index. Over the five-year period, the fund lost 2.0%, compared with an 8.2% plunge by the peers and a 2.7% drop for the S&P 500.
The fund’s standard deviation, a measure of volatility, was 10.50, versus an average of 13.92 for large-cap growth funds. The fund has a 91.0% turnover rate, somewhat higher than the 84.8% average for the peer group. Its expense ratio (0.89%) is well below the peer average (1.41%).
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S&P: Can you describe your investment methodology?
POIESZ: It’s a combination of value and growth philosophies. The value strategy is based upon the belief that three-year earnings power is the principal driver of success. We look for companies that are attractively valued, and which are poised to grow handsomely over three years.
On the growth side, which I oversee, we approach things with a 12- to 18-month time horizon, paying attention to valuation. But more importantly, we ensure that we have above-average revenue and earnings growth in the portfolio at all times. I want mid-teens earnings growth, without paying too much for it.
S&P: Does the fact that lead manager Chris Leavy supervises the value portion of the portfolio skew the fund more towards value?
POIESZ: It’s been very close to 50-50 since earlier this year. It had been skewed more toward value in the previous two years.
S&P: How do you and Mr. Leavy select stocks?
POIESZ: Each of us builds our portfolios independently. On the value side, Chris does a thorough analysis of the three-year earnings prospects of the company, its valuation, and whether the growth prospects warrant buying the stock. He has a smaller portfolio, about 40 stocks, which makes sense because he’s not taking a lot of valuation risk and has the luxury of looking out over three years.
On the growth side, I typically keep a 60-80 stock portfolio. I believe in more diversification because I am taking greater valuation risk. Occasionally I get involved with controversial growth names. I’m willing to get into a stock early when I see something “growthy” and attractively priced that Wall Street doesn’t wholeheartedly agree with.
S&P: Can you cite an example?
POIESZ: A year ago, for instance, Microsoft Corp. (MSFT) was in a no-man’s land — many didn’t think it qualified as a growth stock any longer. My view was that Microsoft was not only cheap, but in the process of re-accelerating. They’ve reported three good quarters that have exceeded the Street’s expectations. Microsoft now is in both sides of our portfolio and represents our largest holding, at 4.8% of assets.
S&P: What are your buy criteria?
POIESZ: On the growth side, we require an attractive valuation and a good unit growth dynamic. I also like companies with strong balance sheets and low debt levels. My average company on the growth side has about an 18% debt-to-total-capital ratio — I don’t like to take financial risk.
S&P: What are your top holdings?
POIESZ: The top ten holdings as of August 31 were Microsoft, 4.8%; Liberty Global Inc. (LBTYA), 2.8%; BP p.l.c. (BP), 2.6%; Altria Group Inc. (MO), 2.6%; Honeywell International Inc. (HON), 2.5%; Wells Fargo & Co. (WFC), 2,4%; Citigroup Inc. (C), 2.4%; JP Morgan Chase & Co. (JPM), 2.0%; Cendant Corp. (CD), 2.0%; and Halliburton Co. (HAL), 1.8%.
However, because the value side is more concentrated, the top holdings include more value names than growth.