Delaware Trend Portfolio
Author: Manish Shah
Last Update: , :
|Investing in small cap sector requires industry and company knowledge. In addition, investors have to be nimble and ready to withstand daily trading volatility. Investors in Delaware Trend Fund have enjoyed steady return over the last...
||Delaware Trend Portfolio|
Q: Is this specific fund measured against any specific benchmark or yardstick?
The Russell 2000 growth is the one that we use as a benchmark.
Q: Would you describe and discuss your approach to diversification?
We diversify pretty much along the broadly defined sectors. Since we use a bottoms-up approach and we are not tied to a specific sector, the names that we own tend to be spread out among the sectors. We do strictly adhere to our 5% rule meaning that not more that 5% of the portfolio can be held in a single name.
The distribution among the sectors and sub sectors varies from month to month. We look at the returns by sector on a daily basis, and run a very detailed report by sub sector weekly using weighted returns. We want to know if our performance was the result of stock selection or sector selection.
We normally average about 80 stocks in the portfolio and our turnover rate is more than 70%.
Q: To better understand your approach, could you give a couple of specific examples of how you picked a specific stock, what thinking went into the selection, what happened with the stock, and then how did you end up selling it.
An example in the consumer sector might be Coach (COH). We still have the name in our portfolio so I donít have the end of the story yet. We first saw the company presented at a conference three years ago. The company had been spun out from Sara Lee a few months before. They were transitioning into a fashion accessory business and had just launched for the first time a logo collection. Within a few weeks of opening the line in Japan, sales of that line had grown to 10% of their total sales. We saw the potential of the line as they moved into their other markets, and believed that it should be able to really move the needle. It has proven to be one of the great success stories in retailing in recent history.
While we did not predict how successful the company would be, as the story unfolded, each step got better and better. They keep expanding market share tremendously and widening their appeal all the way from teenagers to grandmothers. They have designer customers that are trading down to their bags, and customers that donít typically go into the affordable luxury space trading up.
The companyís operating margin is more than 30 percent and continued growth have given it increasing economies in scale. They still have a lot of room to grow. Even in Japan, where they grew 85% last year, they still only have a 4 % market shares. The company believes they can expand that to an excess of 10% market share.
So at this point the stock has done well and has very healthy multiples; but you pay for scarcity value. There is not another consumer product company out there that has margins over 30%.
Q: And why do you continue to own it?
When we look at the continuing sales growth and see numbers in the high 20s and lower 30s, it suggests the company still has tremendous momentum behind it. We have seen their new collections and feel that they should resonate well with the customers.
Q: Do you have an example in the non-retail sector?
Perhaps Protein Design Lab (PDLI) in the biotechnology industry would be a good example. The company specializes in monoclonal antibodies. While they didnít have their own pipeline, they had the technology to humanize antibodies. It is a company that we believe has a terrific future. Historically, antibodies used in the manufacturing process were from mice that can sometimes cause an adverse reaction because they werenít human. Protein Design Lab technology is a technology to humanize the antibodies to therefore make them acceptable to humans.
Although the stock had a good run back in 2000 when it peaked just above $80, it has been below $20 recently. Many investors gave up on the company and were not willing to wait the years necessary for the company to bring a product to market, but they were shortsighted. While the company doesnít have its own drug yet, it has been using its technology in partnership with other companies. They receive a royalty on drugs that are developed using their technology. One drug that has recently been approved is Avastin, which is a colorectal cancer drug developed by Genentech. While PDLI gets only a small royalty, it goes right to the bottom line.
PDLI is also working on their own pipeline. They have a few early stage drugs that are promising but it takes a long time to determine their value.
Q: Maybe you could describe a stock for which you had high expectation that did not work out, and, specifically, how you reacted to the situation?
Often times we do take a long-term approach and hold on to stocks even though they are not performing. But when it is clear that the companyís situation has changed, we donít hesitate selling.
A good example would be American Italian Pasta. They are a pasta manufacturer, but donít run restaurants. They recently gave guidance that their outlook had become cloudy due to the low carbohydrate diet craze. We had already starting questioning the potential impact of the craze, and the management warning was icing on the cake. We sold out. While we still believe in the company, we just felt that there was a better place for our clientsí money than waiting for the craze to end or for the company to reinvent itself.
Q: We are starting to see more and more success stories in the e-commerce and e-retailing space. Blue Nile is one example, but there are a number of other online companies that are having some success in the jewelry business. What are your views of online retailing and how do you evaluate the trends?
Five years ago everyone believed that online retailing would eat into the business of all the brick and mortar companies. That didnít happen. Instead, many of the brick and mortar retailers have benefited by building very healthy online businesses that are adding profits to the bottom line.
If you look at companies like Williams Sonoma, this is the first year their online business is going to pass catalogue sales. So consumers have definitely become comfortable shopping over the Internet. There are a number of strictly Internet-based companies, like Amazon and Blue Nile, which have found a niche and successfully exploited it to the detriment of some brick and mortar retailers. But at this point, I canít think of another sector that faces a big risk from an online startup.
1 2 More: Mutual Funds Archive