Interview: Tony Weber and Chuck McCurdy of ABN AMRO Veredus Select Growth Fund

Quick Take: For the typical business manager, market inefficiencies are an obstacle to growth. But for the management team ABN AMRO Veredus Select Growth Fund/N (AVSGX), inefficiencies — in stock prices, at least — are the main sources of asset growth. The fund’s three co-managers, Tony Weber, Chuck McCurdy, and Charlie Mercer, scan the large-cap universe for stocks they estimate to be substantially underpriced by Wall Street.

Founded at the end of 2001 with U.S. markets in correction mode, the fund lost 29.4% in its first year of operation, versus a losses of 22.1% for the S&P 500, and 22.2% for the average large-cap blend fund. But for the three years ended August 31, 2005, the portfolio has beaten its peers and the index, registering an average annualized return of 15.9%, versus gains of 12.0% for the S&P, and 10.6% for the peer group. The portfolio is ranked 5 Stars by Standard & Poor’s.

Though Weber and McCurdy stress that they use the Russell 1000 Growth Index as their bogey, they do not follow the index’s weightings. Nor do they observe any division between growth and value, or other metrics typically relied on by fundamentally managed funds. Turnover on the fund runs high, making it a better option for non-taxable accounts and defined contribution plans.

The fund’s expense ratio (1.30%) is slightly higher than other blend funds (1.04%), but lower than large-cap growth funds (1.41%). The top five holdings in the portfolio as of August 31 were Johnson & Johnson (JNJ) 4.2%; Dell (DELL) 4.3%; Genzyme (GENZ) 4.0%; Bear Stearns (BSC) 3.3%; and Gilead Sciences (GILD).

The Full Interview:

S&P: How would you describe your investment philosophy?

WEBER: The foundation starts with screening for earnings surprises and subsequent asset revisions. Our universe is essentially the number of companies that have sell-side research published on them. We’re not focused on earnings growth, p/e, return on assets, or return on equity, but where we feel the inefficiencies of the market lie.

S&P: Tell me about your process of selecting stocks.

WEBER: Chuck, Charlie, and I get together once a week to take care of any problems the portfolio might have. Our nine analysts are focused on the new names popping up on our screens. They’ll give us a one- or two-page bullet-point write-up — we don’t write research reports — and a model of where the leverage is between our expectations and the Street’s. We’ll make a determination within an hour as to whether that name should make its way into the portfolio.

We typically buy a 2% to 2-1/2% position initially. This is a more concentrated portfolio, with 30 to 50 names, of which the top 10 make up 40%-45% of assets. We’ve got two traders executing our trades.

S&P: What are your buy criteria for stocks?

WEBER: We want companies that have put up at least two quarters of positive earnings surprises, and for which our estimate is well above the Street’s — ideally, 20%-25% higher. We want them to attack a very large marketplace, and to have the ability to build barriers to entry.

We want to make sure that whatever service or product the company provides, it does so in the most efficient way, which should expand gross margins. If management is good, that should drop down to the operating line.

We also want a balance sheet that is growing commensurably with the income statement, and don’t want to see receivables or inventory outstripping revenues quarter to quarter.

S&P: What about your sell criteria?

WEBER: We don’t base things on valuation, because it can go to extremes on both the upside and downside. If we have earnings disappointment and there’s no overriding valuation case we can make, which happens maybe 5% of the time, the stock is sold categorically. Ideally, we want to anticipate that.

S&P: What is your time horizon?

WEBER: It varies. Homebuilder D.R.Horton (DHI) has put up 32 straight quarters above expectations. With a technology company, our time horizon may be one or two quarters if they don’t execute.

We trade our positions a lot. Often, we’ll take a 4% position to 2% and try to buy back cheap to try to add value.

McCURDY: We approach growth differently than traditional growth managers, who look at companies that they think are going to grow earnings at X percent for the next five years. That’s a long time to wait to find out if you’re wrong.

S&P: How are the fund’s assets typically allocated?