By now advisors have heard the hue and cry of many experts imploring them to move away from value investing and into growth investing, and it’s something that may be worth considering, especially for advisors who believe that the markets tend to revert to the mean after the long run that value investing has had.
Finding a growth fund that has performed well during the period in which value investing was in favor can be daunting, but it is not impossible. One such fund is the all-cap $1 billion Hartford Growth Opportunities Fund (HGOAX), sub-advised by Wellington Management Company, LLP, and managed by Michael Carmen since 2001. Carmen, senior VP and partner at Boston-based Wellington, credits his success with the fund to his “contrarian” tendencies and “sector agnostic…go-anywhere” strategy that permits investment across the market-cap universe, in stocks that could be considered at different times in the growth or value camp “depending on where they are in their cycle.”
The fund gets five stars across the board from Standard & Poor’s, and has had average annual total returns of 20.53%, versus 9.88% for the S&P/Citigroup 1500 Growth index, for the five years ended November 30; 19.98% compared with 8.65% for three years; and 28.72% compared to 9.44% for the one-year period.
We spoke to fund manager Mike Carmen by telephone from Boston in early January.
How much money do you manage over all?
For Hartford I run almost exactly $4 billion now, [however, including money managed for Wellington Management] it’s closer to $9 billion.
What’s your investment process?
My overall investment process involves fundamentally seeking companies that have accelerating tangible operating momentum, or what I refer to as A-TOM [aay-tom]. At the core what that means is that I’m seeking companies that have accelerating revenue growth, and improving operating margins, and earnings growth that is going to exceed consensus expectations.
Do you screen these quantitatively first?
The problem is it’s very hard to screen for [accelerating growth in the future] because most screening is historically looking backwards, so it really is a lot of blocking and tackling. It’s meeting with and talking with hundreds and hundreds of companies over the course of the year, between myself, my team of dedicated analysts (six dedicated analysts), and Wellington’s (54) global industry analysts. It’s culling, from all of those meetings, the companies where we qualitatively see some catalyst or driver–whether it’s a retailer with a new merchandising strategy, or a technology company with a new product cycle, or it’s a biotech company with a new approvable product–that’s going to drive the better-than-expected results. It’s going to drive better top-line results and improving operating margins. So it starts, really, with those meetings; you can’t really screen for it.
Once we do those meetings we try to quantify what those catalysts mean for the earnings progression of that company, and we’re usually looking out two calendar years–so right now everything we do is predicated on what we believe a company can do in calendar ’09. Once we do that analysis we can compare that to consensus and we ask ourselves, “How are we differentiated versus consensus?” because that’s the core of what we’re trying to do. [It] is to try to find these companies that have accelerating trends–but we want to buy the ones that have not just accelerating trends, but [also where] we have a differentiated view relative to the consensus. So the result after doing that analysis is we think that company is going to earn X. Is X equal to, less than, or more than what consensus is looking for? We want to identify the ones [in which] our view is above consensus and those are the ones that we want to buy in the portfolio, predicated [on the fact] that those stocks have, in our mind, at least 30% to 40% upside from where we initiate the position.
So this is strictly growth–there’s no value component at all?
It’s strictly growth–the only value component is that we do have price targets for every stock in the portfolio. Yes, we want to find the best growth companies with the best prospects, but we don’t want to overpay for those companies. The last part of the process is based on the level of earnings growth, the sustainability of that earnings growth, the quality of the earnings growth, the quality of the company, the quality of the management team, and the relative attractiveness of that industry. We’re going to say, “We believe that this company, in calendar ’09, is going to earn X amount. What do we think is the right multiple to place on that earning? Does it deserve a market multiple, a greater-than-market multiple, a below-market multiple?” That’s how we determine what we think is the right multiple to pay. Once we apply what we believe is the right multiple, we compare that to the current stock price, and we like to see at least 30% to 40% upside before we initiate a position. If it only had 20% upside, most likely we would put it on our target list with a lower buy-point and wait to see if we get a correction in that stock.
Is this how you sustained your growth objective through a market that was so favorable to value investing?
We did very well–obviously last year was more growth, but [we did well] even in ’02 [through] ’06 when it was more of a value market. Number one, in any market [when] companies are beating expectations, those stocks are going to react positively. Maintaining that discipline of looking for those kinds of companies was very helpful. Second, because of the way we think about stocks, we are basically sector-agnostic. If we think the best opportunities are in energy, or basic materials, or gold, we’ll go to those sectors. We’re not married to the “traditional growth sectors.” Last year, one of our best-performing sectors was fertilizer stocks (see “When Value Means Growth” sidebar).
Is that what makes this fund different from other growth funds?
I think so. One of the differentiating factors is the go-anywhere aspect of the fund. I try not to really define what growth and value are. If you look at the indexes–the Russell 3000 Growth versus Value, the names constantly switch from one to the other, depending on where they are in their cycle. What I’m trying to do is capture stocks early in their growth cycle because one of my tenets is that pretty much every company is cyclical. For every Cisco out there that you find that has a good 10-year run, there are a lot of other companies out will have great runs for some period of time and will have some cyclicality to them. I want to capture that part of the growth cycle as early as possible. Going back to the fertilizer stocks that’s what happened. They were in a period where they were in a lull, and then things were setting up last year between ethanol, and China, India, and other emerging markets on the food side, and the fuel side, and everything came together and culminated in a very tight market last year–that’s what really drove pretty strong earnings growth for these companies.
I noticed you are light on the financial sector?
I think this was a great call. Wellington has so many phenomenal, experienced analysts that cover that particular sector, and they were, very early, saying that things were going to get very dicey in the financial sector, particularly in the banks, and S&Ls, and companies in the housing sector. So that was a good warning for me. Second, the financial sector last year was the opposite of what I do. It was what I’d call D-TOM–things were decelerating across the board, so to me, it was a very easy call. There were no accelerating trends there, there were strong decelerating trends, and so based on my process it was very easy to say this is a sector we don’t need to be fishing in very much this year. That’s what drove the underweight, and we continue to underweight today.
Do you still see the financial sector as not ready to accelerate?