Going for the Good Growth
Delaware American Services Fund
Author: Alexander Vantchev
Last Update: , :
|John Heffern and Marshall Bassett run the Delaware American Services Fund with the belief that a good stock picker can spot a solid grower regardless of the valuation or the market’s latest flirtation with a particular sector. Heffern told Ticker how and why their fund remained in the top fifth of its peer group, beat the market handily, and did it without any exposure to tech and telecom.
||Delaware American Services Fund|
Q: What is the sell trigger, then?
At the end of the day we are looking at revenue, margins, and earnings per share. If we are disappointed on any of those, we don’t automatically blow something out, but we take a look at it are very stingy giving companies the benefit of the doubt. If we see a miss on revenue, a miss on margins, a miss on earnings, we’ll look at it, we’ll understand the explanation and if it is insufficient, we’ll just sell it and get on with our lives.
Q: And how long after the conference call will that happen?
That can happen right away. We don’t brood over these things.
Q: Which of your best-performing stocks you still hold?
My colleague, Marshall Bassett, owns Coach, the leather goods retailer, and we have done well with that. We own Sovereign Bancorp and it has performed well also. We continue to own the homebuilder D. R. Horton. Comcast is our largest holding. We really haven’t done especially well with that. Our position is up about 10% or so, but that is something we continue to hold as a core position.
Q: I saw Cox is also one of your largest holdings. How did you choose those two – Comcast and Cox?
Comcast was for its size and its ability to leverage size in the cable business and the impact that will have on margins and profitability. And Cox – perhaps the Comcast guys would disagree – is the best-managed company in this space. They have just done a fabulous job, albeit with a smaller footprint. And to the extent there is an opportunity in IP telephony, I think Cox has done well there in some of its test markets and we think that can produce good growth on its own. It was understanding the differences between the two and we sensed that we could make money on them both.
Q: Do you play the consolidation drive, say in financial services, or you focus more on the organic growth?
Everything we have invested in has always been for the organic opportunity. And we always viewed consolidation activity as additive, but not necessary. It is just nice to have that in the background. The fact of the matter is that financial services have been consolidating and we believe will consolidate forever, but that means two things – the big get bigger, the middle sort of get squeezed out. And they are always making new small companies that are hoping to become big.
So, I think we can pick our way through. We own Citigroup, for example, but we also own a company called RAIT Investment Trust, which is a small financial services company in Philadelphia, investing in commercial real estate. I am convinced we can sort through these areas, find good companies at the right time and the right cycle, and I think the same my partner will say holds true for specialty retail. There are big retailers, but there are also small retail companies coming along. There are restaurant conglomerates, and there are also specialty restaurants that we can invest in. They may give you a significant boost to growth and they are a nice offset in the portfolio to larger, somewhat more mature companies.
We think that in terms of portfolio construction, our ability to match the large with the small and sort of synthetically create the middle gives us this opportunity to produce sustainable growth over time. We are very much driven by absolute returns.
Q: What is your biggest disappointment of a stock that you had?
We didn’t have one this year, but I once owned Adelphia. It was a significant position for us and we were hurt. The offset was that as a portfolio we still produced good returns. So, I think we have done a pretty good job with risk management and the moment we saw problems at Adelphia, we just sold it.
Q: If a potential investor looks at your fund and considers putting some money into it, what can they expect and what they should not expect?
They should not expect us to always be in sync with the market. Because at the end of the day, we are a specialty fund and we do exclude significant sectors of the market. As a result, our task is to deliver good absolute returns over a long period of time, but our sector exclusions can cause us to be out of sync with the market periodically. We would accept that as just a part of our investment process. Investors should not lose sight of this fact. On the other hand, I think it is a fund that could be considered by an individual who is diversified across a number of funds or investment vehicles. Many traditional growth funds are managed with a bias away from financial services, and we view that as unnecessary. This fund is a growth fund managed with a bias towards the sectors traditionally excluded by the traditional growth fund.
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