Q: What was the idea behind that particular portfolio and what was its evolution?

[A: The growth investment team, for which I work, has been in place since about 1997. It took over for the previous managers and implemented a very sector-oriented, fundamentally-based investment management process covering growth stocks and focusing on the main engines of growth in the economy:, technology, healthcare, consumer and retail, and financial services.

By the end of 1999, we were successful with small-cap, mid-cap, and large-cap growth investing, but we also recognized that we had within the group a certain sector expertise. It focused on the fact that there has been a strong shift in the economy from manufacturing to service-oriented employment.
So, our sense was that there was an investment opportunity not just in people who make widgets, but people who help widget-makers become more efficient, more productive, and provide services around all of the products that the economy might produce.

Q: Did you have some kind of a rigid breakdown of the service sector, or you rotate somehow?

A: We are pretty flexible from that perspective. But basically, we own a lot of financial services companies – that is probably the principal weighting and then we are significantly invested in retail and consumer services. We also own, for example, a company that produces scales and weighing instruments. That is the widget. But they also attach software to the scale, giving you aggregate statistics and information about the thing being weighed – whether is cereal or pills. That is the service.

Q: That is Mettler-Toledo, right, the Swiss company?

A: Yes. But they have significant sales and operation here in the U.S. And this is the other part of what we do – not just to focus on pure service companies, but to be committed to owning quality companies that are well-managed and properly run. Mettler-Toledo is a perfect example of that.

Q: You own a lot of financial services, and still you identify yourself as a growth investor. Isn’t there a discrepancy of a sort?

A: We do not necessarily agree with other people’s definitions of where things should fall. We buy growth wherever we find growth, no matter how others define their own universes. And clearly, if you just look at the numbers, financial services companies have produced earnings growth far greater than that of the economy overall in the last three to five years.

Q: Can you elaborate a little bit on your research and stock-picking process?

A: I think the simplest explanation is that we are really traditional stock pickers. And we go one by one, from the bottom-up. It is a very labor-intensive process. We start with the basic screen of companies that are growing faster than the market and then, within their industry sectors, those that are growing faster than their industries overall. And then we just begin to pick them apart, one by one, with a lot of research intensity looking at a company, its positioning, its market, the products that it offers, its margins, its management, its infrastructure. And then probably the last thing we do is apply valuation metrics to the investment process. We believe that companies that are growing sustainably fast are rarely overvalued, and companies that are growing slowly are rarely valued at a sufficient discount.
So, if we find the right company, one that is well-managed, in the right place, selling more products to more people at healthy margins, valuation is the last thing we look at. And with valuation, we tend to be a bit more generous in our view of what that company might be worth. That is our basic process – we just do it one at a time, every day, day in and day out.

Q: You said growing faster than the overall economy. What do you take as the rate for the overall economy?

A: Mostly we focus on the Russell growth indices to get a sense of market growth. You can also look at the growth in the S&P earnings as another point of comparison.

Q: Do you have any capitalization restrictions?

A: There are no capitalization restrictions. We can buy large cap, mid cap, small cap, even micro-cap. I think the difference with us is that we focus on the quality of the company and the management team and the adequacy of infrastructure, because we like to hold our investments as long as possible. Many little companies tend to bet on a specific product that is untested, and are run by a management team that is unproven. The American Services Fund is currently centered on the mid-cap range, where companies are sufficiently developed and yet not overly mature. It is kind of a sweet spot.

The other thing to keep in mind is that we are not looking for hyper growth, because in our view hyper growth can carry its own set of risks. We think that if we find moderate growth – something on the order of 15% to 20%, and that compounds itself over a number of years, we will be successful. And if we avoid hyper growth, which tends to result in hyper explosions, it allows us to manage risk. We are looking for companies where we think growth can be sustained in the 15% to 20% range.

Q: You said you like to hold them. What does it mean in terms of turnover?

A: Our turnover is probably running in the low 100% right now, which I think is about normal for a growth fund. We have a core group of companies which we buy and hold, and then around the edges, we have the flexibility to look for short-term market opportunities.

Over the course of time we have exploited opportunities in insurance. We had some insurance exposure prior to the tragic events of September 11, 2001, but then insurance stocks were hit, in light of the enormous insured losses. However, that presented an investment opportunity in the market, with the accelerating pricing trends in the insurance business, and we took advantage of that.

Another example is that at one time we had a significant weighting in homebuilders. We continue to own some homebuilders that are doing well, but we also took profits along the way. That was a clear investment opportunity, also resulting from some price weakness around the time of September 11.