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Peter Tuz: You are correct. Our large cap fund is outperforming our mid-cap fund substantially in 2014. Our mid-cap fund had an excellent year in 2013, rising 38.29%. First of all, larger stocks have done much better than smaller stocks this year. For example, the Russell 1000 is up 12.56% while the Russell 2000 is up only 1.68%. Secondly, we think some of the underperformance of our mid cap fund this year was caused by many of the strongest stocks in the fund last year falling in the first quarter of this year. In the first quarter, the mid-cap fund fell 2.25% while its Lipper peer group rose 1.37%. We were much closer to the benchmark in Q2 and Q3 and so far in Q4 (as of 11/17/14).
MutualFunds.com: Skyworks Solutions (SWKS) in particular seems to be one of your favorite names as it’s found as a top holding in both funds. What is that company doing better than other chip-related names that make it a favorite? In the same vein, do you sometimes go deeper in a particular hot area where there are several competitors or do you tend to identify the main “horse” and ride that particular company.
Peter Tuz: Skyworks has been an exceptional stock for us as you rightly noted. It is in both funds and is up more than 120% year to date (through 11/18/14). The company seems to be in the right place at the right time. It is a leading maker of semiconductors used primarily in various wireless devices and is selling more products as devices connected to the internet proliferate. To answer the second part of the question – “go deeper or stick with the main horse” the answer is we do both. We don’t like to see individual stocks in the large cap portfolio get to more than 5% of its total value and 4% in the mid-cap portfolio. So if we like the industry a lot, we might buy two companies in it. For example, we’ve owned both Visa and MasterCard in the payments technology space. Yet we frequently own just the leading player in an industry as well – Schlumberger in oil services now for example. The mid-cap space is a little different in that there is usually less industry overlap than in the large cap portfolio.
MutualFunds.com: Another name that jumps off the page in looking at your top holdings is Gilead Sciences (GILD). Now, Biotech has been the hottest sector on the planet when it comes to growth, so do you see the fund placing more bets in the space or do you think the current run may be a bit rich for new capital deployment?
Peter Tuz: Biotech stocks have certainly been strong in the past year or two and we’ve been helped by owning Gilead, Biogen and Abbvie (Humira). By many metrics important to us such as p/e to growth rate, these stocks are still attractive. Other companies in the sector might well be highly valued right now, but we try to weed those out in our stock screening process.
MutualFunds.com: Take us through the nuances of managing multiple funds and how you try and allocate funds without duplicating many of the same bets you like. The turnover ratio is a bit high compared to other funds. Could you walk us through the process of fund turnover and how that looks from a fund manager’s perspective?
Peter Tuz: Managing two growth funds is not difficult since we use the same investment process for both – looking for growth, consistency and reasonable valuations. We occasionally will buy one of the larger mid-cap stocks for our large cap portfolio. This usually occurs after that particular stock has done exceptionally well. We believe our turnover is fairly average for a growth stock manager. Again, it is the result of following our screening process and also reflects our general trading pattern of scaling into and out of stocks usually in 2-3 trades both on the buy and sell side. Trimming positions as they get to be too big a part of our portfolios, or start to fail our fundamental and technical indicators, is one of the risk control measures that we’ve long used. We’ve found it far better to pay $0.03 per share to trim or exit a position than to risk a much bigger loss should bad news emerge from a holding.
MutualFunds.com: Now that the Federal Reserve has stopped its latest Quantitative Easing Program (although many investors are starting to lose track of how many times they have started and stopped), have you had to change your perspective when trying to identify new opportunities or simply adding to existing favorites?
Peter Tuz: We haven’t changed our perspective at all in our funds in regards to the Federal Reserve’s actions. We rely on our stock screens to tell us what sectors, industries and companies the market is favoring and go from there in building portfolios. Over time, the screens we use will give us the “big picture” and tell us what sectors, industries and companies are doing well and we will react accordingly.
MutualFunds.com: What are the main themes investors should pay attention to as we head into 2015?
Peter Tuz: As you recognized in your last question, this has undoubtedly been a market driven by ample liquidity and low interest rates. So there may be many companies in slow growth industries selling for prices that aren’t really warranted when you look at their growth rates closely. It’s our job to weed those out and focus on companies that are growing faster than the economy and still have stocks selling for “reasonable” prices. Investors would do well to pay attention to this as well as the other “macro” factors that will make themselves evident in the coming year; things like whether the strong U.S. dollar continues to hurt earnings of our multinational firms, whether energy prices turn around or continue on a downward tilt, whether the U.S. economy finally gets to a stage where growth can be sustained without easy and cheap money.
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.
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