The next stage of the market rally will likely favor high-quality stocks, according to Scott Thompson, manager of the Aston/Montag & Caldwell Mid Cap Growth Fund Ticker:(AMCMX).
“We would expect stocks to continue to grind higher, but the 2011 earnings forecast shows weaker profit growth in the year ahead,” he said. “As that unfolds, it means a rotation back to high-quality growth stocks.”
The fund’s bottom-up stock-picking strategy, which is deployed by a five-person committee, looks for companies with leading franchises, strong management teams and share prices that are trading at discounts to intrinsic value.
“We are valuation sensitive, and we’re finding fewer companies today than we were finding 18 months ago,” he said. “But there are still some interesting and compelling ideas out there.”
In the technology sector, for example, Mr. Thompson is still a fan of Polycom Inc. Ticker:(PLCM). The leading supplier of enterprise voice and video technology has a new management team and is the last public pure play in the video conferencing arena. The stock has gained more than 40% from the start of the year.
In the consumer discretionary space, Mr. Thompson said Omnicom Group Inc. Ticker:(OMC) is benefiting from the recovery of advertising demand. “There has been a nice recover in ad demand as more companies are turning to offense,” he said. “That should lead to growing demand for advertising and marketing services.”
Omnicom shares are up more than 16% from the start of the year.
Mr. Thompson manages the fund as part of Montag & Caldwell LLC, a $15 billion asset management firm.
The fund, launched in September 2008, has only $4 million in assets, but Mr. Thompson also manages $50 million in separate accounts in the strategy, which is a mid-cap version of the $3 billion Aston/Montag & Caldwell Growth Fund Ticker:(MCGFX).
The primary distinction between the mid-cap and large-cap funds is that the mid-cap fund will hold between 45 and 65 stocks with market caps of between $2 billion and $10 billion; the large-cap fund maintains a more concentrated portfolio of between 30 and 40 stocks.
While smaller companies tend to outperform in the early stages of market rallies and bull market runs, Mr. Thompson makes the case that investors should not automatically reach for the smallest of the smaller companies.
In comparing the Russell MidCap Index with the Russell 2000 Index, the mid-cap category outperformed small-caps over the one-, three-, five-, seven-, 10-, 15-, 20-, 25-, and 30-year periods through June 2010.
Further, the mid-cap index did so with less volatility as measured by standard deviation.
“We believe the mid-cap space often is overlooked as an asset class by investors when determining asset allocation,” he said. “In our experience, institutional investors tend to gravitate towards large- and small-cap style boxes in their equity allocations.”
Mr. Thompson’s fund might be low on assets, but it has been putting up some big returns over the past few years. Last year it gained 37.7%, which compares to a 26.5% by the S&P 500. This year through last Wednesday, the fund had gained 18.6%, while the S&P gained 7.8%.
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.
