Portfolio Manager Perspectives

Jeff Benjamin

Post-stimulus, mid-caps won't be half bad

Inflection point could be a change in the Fed's stance on interest rates

Mar 10, 2011 @ 12:37 pm

By Jeff Benjamin

When the federal government starts weaning the economy off the various stimulus programs put in place after the financial crisis, high-quality growth stocks once again will start leading the market, according to M. Scott Thompson, manager the Aston/Montag & Caldwell Mid Cap Growth Fund Ticker:(AMCMX).

“Until now, the market rally has been led by lower-quality stocks, but as the economy shifts from recovery mode to expansion mode, with less government stimulus, we're going to see a shift toward higher-quality growth stocks,” he said.

“The inflection point could be marked by a change in the Fed's stance on interest rates,” Mr. Thompson said. “When [the second round of quantitative easing] concludes this summer, risk aversion should increase, and as that stimulus goes away, the economy is likely to see more difficulty in sustaining the growth we've seen so far.”

With that in mind, Mr. Thompson continues to bank on some of the sturdier names, with a particular emphasis on the industrial, energy and consumer discretionary sectors.

“We're looking for earnings growth with attractive valuations, because we're trying to identify stocks that are trading at a discount to their intrinsic value,” he said. “We like accelerating earnings growth because we believe that the faster earnings growth will attract investors and drive the share price toward the intrinsic value.”

Launched in November 2007 as an extension of a separate account strategy, the mutual fund is tiny at just $5 million. But it is part of a $15 billion asset management complex at Montag & Caldwell Investment Counsel.

Despite respectable performance, the strategy faces the same challenge as most mid-cap funds, in that the category is often an afterthought.

“In our experience, most investors seem to ignore the mid-cap space,” Mr. Thompson said. “But looking historically at how mid-caps have done, compared to small-caps, the mid-cap space is where you get superior returns with less risk than small-caps.”

The fund concentrates on companies with market capitalizations of between $2 billion and $10 billion, which is narrower than the $1 billion to $23 billion range of its benchmark Russell Midcap Growth Index.

Last year the fund gained 27%, while the index gained 26.4%.

The fund is relatively concentrated with about 50 stocks; Mr. Thompson keeps the annual turnover rate at around 50%.

One of the stocks meeting the bottom-up research process is Amphenol Corp. Ticker:(APH), a supplier of high-speed fiber optic connectors.

In addition to benefiting from the rapid growth of the smartphone and tablet computer markets, Mr. Thompson said the company's products also are used in the automobile, airspace and defense industries.

Another example from the portfolio is Expeditors International of Washington Inc. Ticker:(EXPD), a third-party freight broker.

Both stocks, according to Mr. Thompson, should be expected to sustain earnings growth in the mid-teens over the next couple of years.

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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