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Winning by Thinking Outside the Box
Quaker Aggressive Growth Fund
Interview with: Manu Daftary

Author: Dave Jennings
Last Update: , :

For complete profile and charts on Quaker Aggressive Growth Fund
True, the Quaker Aggressive Growth Fund charter allows its subadviser, Manu Daftary of Boston-based DG Capital, to sell short. However, the veteran manager combines that strategy with a mix of trading, longer term holds, plus the capacity to seek growth opportunities throughout all areas of equity capitalization. Morningstar ranked the fund first in the large cap blend category for five-year performance as of May 30, 2003.

Quaker Aggressive Growth Fund

Q: The rating agencies can't quite peg you according to style for very long. How do you categorize the fund?

A: Bottom line, the fund is really a growth-oriented fund. That has pretty much been the case through 1999. Only in 2000, when we started moving out of technology and started buying more of the financial stocks that they started to shift us around in the boxes. My career has been spent in the growth stock area, and I continue to believe that the fund is a growth fund, even though they may bounce it around in the near future. At the current time, I think you could categorize it as a multi-cap core fund. I think that is a pretty good way of looking at the fund. We tend to have stocks that go across all market cap spectrums.

Q: Is the turnover rate of 500% in the past 12 months typical for the fund?

A: The reason it was very high last year was because we have an active component in the fund where we try to protect the downside by raising cash. We were going in and out of the market a lot because we were trying to catch these trading moves that were occurring. Going back to 1999, where the turnover in the fund was maybe in the 60% range, if we can get a good market for stocks where we believe that we can hang onto them for a multiyear period time, we would really rather not have the turnover that high. It was just that the volatility of the market was driving the turnover. Since we're over 90% invested currently, our turnover is starting to drop off quite a bit. We hope to hold our stocks, at least in the mid-cap growth area, for at least a two-year horizon.

Q: Why is that?

A: The reason we hold a little longer term in the mid-cap area is because we want to keep the company because we think it's a nice little company. It's got some growth prospects that we can latch onto. The large cap growth area is where we tend to have a little more activity. It's mainly driven by the fact that the liquidity in trading those stocks is pretty good and we tend to take our profits there. Even though we may keep a core position, we will trade around that core position quite a bit. In the mid-cap area, it's difficult to do because the liquidity is not there. We have some stocks in the portfolio that we've had for over a year.

Q: How has the long-term bear market and briefer recession period influenced your strategy?

A: The last few years have been different because it's been so volatile and difficult. I think our feeling at this time is our portfolio is going to be a lot more stable, meaning that we're going to keep names and tend to hold them for a longer period of time, just because the sentiment in the market has changed somewhat since March. We believe it's time to start looking at the things that we were good at in 1996 to 1999, which is looking for companies with really good growth prospects that have the ability to surprise investors with their earnings power. We've come to the conclusion that we will stay in this 85 to 95% invested range. The only reason to sell stocks is because they disappoint us or we find something better. There is always something better. If we have to throw something out to buy something better, we'll do it. Bottom line, to address your turnover issue, it's really driven by the volatility in our sector to a large degree and it will quiet down going forward. That's our belief.

Q: From the description of your fund on the Website, I learned that the charter allows the fund to sell short. Do you practice this extensively?

A: When the fund was initially established, the president of the fund, Jeff King, had known me for many years. He said to me, 'What do you want to do with this fund?' And I saIdent, 'Everything.' I had no idea that mutual funds could short. I didn't think that was the case. We do have the ability by charter to go 25% short. Generally speaking, the average has run in a range of 8 -12%. It's not a really big reason for our performance, because it's been quite low. The reason we short in the fund very honestly, it's to make money, not to hedge, like market neutral. In many cases, we find companies that we like, but we realize they go through cycles and we maybe can milk it a little bit and short it as well. I always tell people it's not really a big reason for our performance. Currently it's only 3%.

Q: That could confirm recent views by market observers that managers that are net short could be facing a potential squeeze if money flows back into stocks.

A: That is a very perceptive comment. Because we run hedge money outside the fund, it has been very clear to us over the last few years that most of the assets that have been coming into equity markets have really been coming into the market neutral format. Like everything in life, when things get really hot because so much money came in, that market neutral product tends to outperform expectations. I think what is going to happen is that the market neutral mutual funds are going to face a squeeze just because everyone is doing the same thing and there is a lot of money in that strategy. My guess is that they’ve done very well over the last few years and my guess is that they will tend to underperform over the next years.

Q: What is your view on the U.S. economy?

A: Our belief is, very honestly, the economy should start to see some signs of life later in the year. If that is the case, watch out. Lots of new funds will get smoked, as I put it. They're struggling this year and will continue to struggle if we see the squeeze occurring. My guess is that if they start underperforming, money comes out of those assets. I am kind of negative on market neutral funds right now, even though we run one. I don't see the returns there.

Q: Why is it occurring?

A: My guess is maybe the market is telling us the economy is going to be picking up in the second half of the year?

Q: The bond market isn't saying that.

A: I know. The question is if it's right. I do believe that summer is going to be tough. I said that at the beginning of the year. What I mean is you're going to see some strength and then you're not going to see it. We'll really know one way or another in the second half of the year. We've had the bond market go up into March and then sell off until recently. If you were a conspiracy theory person – I'm always looking for some conspiracy. If you remember, we do have a big federal deficit. In the last few days we've had a big refunding. During that period of time, the Fed comes out and says they're worried about deflation. What that does is it makes the refunding go really well. So, very honestly, they saved us a lot of money, you and me, by saying what they dIdent, because the rates would have been a lot higher if they hadn't said what they said. The question I ask myself, is that yes, the summer is going to be kind of weak, but you'll have to watch the bond market. At this point, I'm wondering, at least in the short term, whether this was to get the refunding properly done, because it was so big. It was pretty shocking to me what they said. Actually, it should have panicked the stock market and it didn't, which is very interesting.

Q: The falling dollar is deflationary in the short run, but in the long run it is actually inflationary.

A: Exactly. I'm an economist by trade. I'm wondering whether the market is saying, 'Okay, we're going to get inflation. The currency is dropping and the market is hanging in there.' You know, that's all macro stuff that you think about as you're going home. I think bottom line, if the market is going to do anything, earnings have to come back in a strong way. At this point it is too early to say. We’re going into a summer where things tend to slow down anyway. The thing I was thinking about is a lot of companies have beaten their numbers. The question I have in my mind is whether analysts are being too pessimistic about earnings. My guess is the bar is set very low right now.

Q: What other macroeconomic factor would affect growth in the second half?

A: We're going into an election cycle, too. I know we need to get the economy doing a lot better before the election next year.

Q: What are you doing to determine how the economy is faring for the second half and into 2004?

A: What we’re doing right now is a lot of channel checks. We're talking to a lot of companies to see whether there is any pickup in demand. The June quarter in technology is usually a pretty strong quarter, unlike what people think. The September quarter is really the weak quarter. We'll know in June whether these companies are going to make their estimates. On the other hand, a lot of companies are going to do it. The Gap, Wellpoint. Some of the HMOs are going to do it. Oil and gas companies are going to do it. The day rates are going up in the Gulf of Mexico. We like the wireless plays that are more in the emerging markets, like Nextel Communications. UT Starcom, they are in China. I talked to a source in the company and he said they're not really affected by the SARS virus. It looks expensive, but they keep meeting the numbers. We're actually underweighted in technology relative to our peer group.

Q: Your long experience enables you to examine and understand a diversity of businesses.

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For complete profile and charts on Quaker Aggressive Growth Fund
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