Betting for the long haul could sum up the strategy of Richard Freeman, manager of Smith Barney Aggressive Growth Fund (SHRAX). Freeman seeks out promising small companies and sticks with them, often for several years, thereby keeping the fund's annual turnover around 10%.
A growth investor, Freeman also stresses valuations. He believes "a growth investor who doesn't pay attention to valuations is a fool who will be unemployed."
Freeman's fund has held up well in recent years, comfortably beating the S&P 500 in each of the last three years. Last year, the fund rose 19.5%, versus a drop of 9.2% for the index. The fund carries an S&P three-Year overall ranking of 5 Stars.
Bill Gerdes of Standard & Poor's FundAdvisor recently sat down with Freeman to discuss his investing strategy -- and the stocks and sectors he likes now.
Q: How would you describe the fund?
A: We buy small- and mid-cap companies that we expect will become much larger. About one-third of our current holdings are large-cap stocks, but we bought most of them when they were small-caps, usually under $1 billion.
We're bottom-up investors, who look for companies with unique products and motivated management teams. We consider where managements have previously been and their financial backing.
Q: What are the fund's largest sectors?
A: Our biggest sector is health care. One key holding, IDEXX Laboratories (IDXX), has a unique approach to diseases. Other attractive health care companies include IDEC Pharmaceuticals (IDPH), Genzyme Corp-Genl Div (GENZ), and Chiron Corp (CHIR).
Financial services is another large weighting, because it's a consolidating industry, and the economy needs to finance growth. I like the asset management business, where we hold Neuberger Berman (NEU). Neuberger's CEO, Jeffrey Lane, was my old boss.
Q: Do you consider valuations when investing?
A: A growth investor who doesn't pay attention to valuations is a fool who will be unemployed. For example, we bought Lehman Brothers (LEH), a growth company, when it was beaten down.
Q: What is the fund's turnover?
A: I don't want to sell something if it's doing well. What defines us is our exceptionally low turnover, averaging about 10% a year.
Q: Why did the fund do well last year?
A: We didn't change the portfolio. At our lowest point last year, we were down 0.5%. We like companies that will grow regardless of the economy, such as our biotech holdings.
Q: What are your largest holdings?
A: Tyco International (TYC), Lehman Brothers, Forest Labs (FRX), Comcast (CCZ), and IDEXX Laboratories. Tyco's market cap has gone from $240 million, when we bought it, to $96 billion now.
Q: What areas of the market are your currently looking at?
A: We've been moving into technology, because valuations have become more reasonable. As the Federal Reserve re-stimulates the economy, technology companies will grow, though earnings estimates will fall this year. We are going through a bottoming out process, where fear has replaced greed. From Standard & Poor's FundAdvisor