We recently spoke with the CIO of Davidson Investment Advisors, Ed Crotty. Below, Mr. Crotty comments on the Davidson Multi-Cap Equity Fund (DFMAX).
Insights from Ed Crotty
MutualFunds.com: It’s been a solid and steady run for the Davidson Multi-Cap Equity Fund (DFMAX) in 2014 as well as the recent five-year span. What would you credit to the consistent performance we have seen.
Ed Crotty: The consistent performance reflects the strengths of our investment process and strategy. As an All-Cap strategy, we have the flexibility to shift the portfolio to where we are seeing the greatest opportunities in the market. For the Davidson Multi-Cap Equity Fund, that means constantly being aware of opportunities and risks and then proactively making changes to adapt. Also, our disciplined risk management and portfolio construction are key contributors to the overall consistency of the Fund. We have several investment disciplines, such as maintaining high Active Share, being fully invested and having good diversification across sectors. Additionally, our discipline of maintaining position size commensurate with risk is critical. However, the most important element is always good security selection, and having an appropriate recognition of the opportunities and risks involved in each specific holding. Managing this balance between risk and reward is crucial to long-term performance.
MutualFunds.com: Your top holdings contain several financial names, including J.P. Morgan (JPM), Wells Fargo (WFC), and Morgan Stanley (MS). Do you continue to see a healthy environment for the financial names and what would cause you to reconsider the bullish feelings toward the sector?
Ed Crotty: Earlier in the quarter, we trimmed our position in Morgan Stanley, which was primarily related to our risk management discipline mentioned above. At this time we are slightly underweight the Financial sector as a whole, but still have a positive view on the long-term opportunities; we expect many of these companies will benefit from an improving economy, faster loan growth, rising rates, better capital deployment, and solid capital positions. We would likely reconsider our positions in the sector if we saw increasing signs of a recession in the domestic economy or signs of trouble with credit deterioration. However, those are not the conditions we see at this time.
MutualFunds.com: The current portfolio is quite diversified, but are there areas of the market you are currently staying away from?
Ed Crotty: Yes, we are well diversified, but we have limited exposure within the Utilities and Consumer Staples sectors, as valuations are quite high from a historical perspective and the fundamental growth prospects appear to be lackluster. We also have less exposure within the Healthcare sector, again due to our valuation discipline. Overall, our Davidson Multi-Cap Equity Fund invests in companies that have an attractive balance of growth opportunities while still trading at reasonable valuations.
MutualFunds.com: How are you viewing the current bond market and what is your stance on Federal Reserve direction from here? Do you think they will ever take their hand away from the spigot handle?
Ed Crotty: The Fed has stepped away from quantitative easing and has said they intend to normalize rates, but will remain patient and data dependent. We interpret this as a gradual rate hike in 2015, but limited in the near term due to low and falling inflation driven by weakness overseas and lower energy prices. Furthermore, as our rates rise domestically, the U.S. dollar will strengthen and create a headwind for corporate earnings and exports.
MutualFunds.com: The fund’s turnover ratio is toward the lower end of the spectrum compared with others. How does the management style of the fund managers react when volatility crops up?
Ed Crotty: We believe the turnover ratio accurately reflects our philosophy of being long-term investors. A lot of funds claim to be long-term investors, but their turnover percentage does not support that claim. We invest over a 3-5 year time horizon and use volatility as an opportunity to add or trim current holdings, exit companies that have come to the end of our investment thesis and to add to new positions that we think have greater long-term potential. We like it when there is more volatility, as it can create an environment to find companies that are being misunderstood in the short-term, but can be significant opportunities over the long-term.
MutualFunds.com: Finally, what are the main themes investors should pay attention to in 2015?
Ed Crotty: Energy will continue to be an area to pay close attention to, as it will have large implications for the consumer, the economy, and geopolitics. It remains to be seen how this will play out, but we are considering a scenario in which lower energy prices may last longer than most expect.
Housing remains a key area of focus, as the industry is still well below historical averages. We believe continued economic growth and employment gains will support further growth for home builders and the housing industry as a whole, but it also has important impacts for banks and the financial sector.
We also believe cable, media, and internet companies are going to be fascinating to watch over the year. Last year saw rare declines in television ratings and advertising as more consumers have begun to shift to online video subscription options and advertisers are shifting budgets to online digital video. This is stressing the legacy business models of many cable and media companies, pressuring them to adapt more to an online world. Additionally, upcoming rulings at the FCC about net neutrality may have a big impact in how many companies in all these industries position and invest in their future business.
The Bottom Line
Ed is Chief Investment Officer and member of the executive team overseeing the firm’s overall investment process. He also serves as co-portfolio manager for the Davidson Equity Income and Intermediate Fixed Income strategies. Ed has 15 years of investment industry experience, having worked at Goldman Sachs in New York as a research analyst and portfolio manager prior to joining Davidson Investment Advisors. Ed is a member of the New York Society of Security Analysts, CFA Society of Seattle, and serves on the Board of Directors for Davidson Investment Advisors. Ed earned BS and MS degrees in engineering with honors from the University of Illinois-Urbana/Champaign and an MBA in finance with honors from Columbia University in New York City.
For more information on Ed Crotty and Davidson Investment Advisors, check out DavidsonCompanies.com.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.