Portfolio Manager Perspectives

Jeff Benjamin

Aston’s Zerhusen: Ignore mid-caps at your peril

No longer ‘silly-low priced’ after last year’s run-up, but space still has plenty of winners

Jan 29, 2010 @ 12:54 pm

By Jeff Benjamin

Investors are ignoring mid-cap stocks at their own peril, according to Thyra Zerhusen, manager of the $1.3 billion Aston/Optimum Mid Cap Fund (CHTTX) from Aston Asset Management.

“Mid-cap stocks, in general, have done better than large and small cap, and it’s silly the way they are getting ignored,” she said.

The fund’s portfolio of just 40 stocks benefited from the market’s downturn a year ago when Ms. Zerhusen was able to load up on companies that had seen their share prices beaten down.

“Before and right at the market’s bottom, we were putting more money into stocks that we thought were silly-low priced, and totally, completely oversold,” she said.

That kind of aggressive approach helped propel the fund to a 66% gain last year, which compared to a 26% gain by the S&P 500.

To keep the momentum going, Ms. Zerhusen said the key will be bottom-up fundamental research that pays particular attention to the current earnings season.

“You have to be very careful and look closely at how the companies are reporting their earnings,” she said. “We’re still seeing some companies report better than expected earnings, but you have to pay close attention.”

Ms. Zerhusen, who started managing the fund in 1999 when it had just $20 million, has concentrated on a niche in the mid-cap space by identifying those companies that are growing and operating like much larger businesses.

For examples, about half of the companies in the portfolio are getting at least 50% of their revenues from outside the United States.

Among the stocks she holds is H&R Block Inc. (HRB).

At less than $22 per share, Ms. Zerhusen said the stock is still “inefficiently priced,” considering the pace at which the company continues to gain market share.

Another stock that hit her radar screen during the market downturn is The McGraw-Hill Companies Inc. (MHP).

Despite its association with struggling of media and book publishing outlets, just 2% of the company’s revenue comes from advertising sales, and 70% of operating income is based on financial data and information, she said.

To Ms. Zerhusen, a mid-cap company is one with a market capitalization of between $2 billion and $12 billion.

The fund’s 23% annual turnover rate implies a strong commitment to her investment picks.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .


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