An investor can be sensitive to the environment and still profit. That's the lesson of the Winslow Green Growth Fund (WGGFX), as explained by its portfolio manager, Matthew W. Patsky. Through June 30, his fund was up 52.9% for 2002, vs. 19.3% the benchmark Russell 2000 scored for the same period.
Patsky says the fund, which focuses on small-cap growth stocks, changed course at the end of 2002 to stress noncyclical stocks that would be insulated from the slow economy -- largely in health care and technology. And the fund screens stocks not only for their friendliness to the environment but for their corporate governance via databases, visits, and a full-time environmental auditor on the fund's staff.
These were some of the points Patsky made in an investing chat presented July 31 by BusinessWeek Online on America Online, in replying to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from this chat. A complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Matt, what's your take on this upsy-downsy market?
A: The market obviously has been very volatile recently, and a lot of this has to do with the anticipation of the market being very robust. We're very comfortable that we're in an economic recovery, and while it may be slower than people have expected, it will be sustainable, and the stock market is certainly the right place to be. There will be upward pressure on interest rates -- it will be difficult to make money in bonds, and we think equities will be the preferred investment vehicle over the next five years.
Q: The fund you manage, Winslow Green Growth Fund, was one of the top funds in its category in the second quarter. How come you've done so well lately?
A: We had repositioned the fund in the end of 2002 to be in companies that we felt would grow regardless of the pace of the economic recovery. We really looked for names where we thought the companies were not cyclical plays -- they wouldn't be dependent on a recovery, and we'd see sustained growth. They're niche businesses -- health-care and technology plays where we'd see growth because of any advantage they'd offer, etc. So we really changed the whole structure of the portfolio to get in position for that.
Q: Are you doing small caps, micro caps, or what?
A: We're small-cap growth.
Q: Matt, tell us how you go about picking stocks. Do you pay attention to valuations or what?
A: We do pay attention to valuations. I think we're mostly focused in on trying to find companies that are able to grow because of the product or service they're offering, regardless of economic cycles. We're focused on quality of management and product.
In addition, we do environmental screening on each of our issues. We do our best to make sure we're reducing our off-balance-sheet risks. Environmental impact and corporate governance are some of the nonfinancial metrics we look at in our stock selection, which is instrumental in our performance.
Q: What are some of the niche companies in health care and tech that have done well for you? What are your top five holdings?
A: Our top five holdings are Polymedica (PLMD), Sonic Solutions (SNIC), Conceptus (CPTS), Whole Foods Market (WFMI), and Friedman Billings (FBR). As far as the niche companies, Atherogenics (AGIX) has been great. It's developing a drug that actually helps reverse the process of the buildup of plaque in the arteries. It's in Phase 3 trials. We purchased most of our position at $5 to $6 per share, and it's currently at $15.
Staar Surgical (STAA) is developing an implantable lens that has already been confirmed to be safer and more effective than Lasix surgery, and more importantly, reversible. Software is also where we've had some of our biggest gains, but I could go on all day with company names.
Q: What are the key criteria for being considered "green"?
A: We're primarily looking at the impact of the company's operations from sourcing through disposal of the product, and the life cycle of the product, to measure whether or not they've taken into account every facet of environmental impact. We're looking for companies that have a positive impact on the environment.
Q: What is the mean capitalization of the stocks you hold?
A: The mean market cap is $300 million. We generally don't hold companies over $2 billion in market cap, but make exceptions when we've been investors since the beginning. An exception there is Whole Foods, which is now a $3 billion market-cap company. We first got in when it was $200 million, and we're maintaining our position in that company.
Q: What are your year-to-date performance figures? And one-year, vs. your benchmark index?
A: I'm going to give you the year-to-date through June 30. We're up 52.9%, vs. the benchmark of the Russell 2000, which is up 19.3% for the same period.
Q: What's your largest sector exposure? And can you name the stocks you own in that sector?
A: Our largest sector exposure is still health care. We talked about the largest holdings already, Polymedica, Conceptus, Staar. The second-largest is software, where the largest holdings are Sonic Solutions, Pinnacle (PCLE), and Akamai (AKAM).
Q: What are some of the biggest negatives that keep a company out of your screening results?
A: On the environmental side, usually they tend to be weeded out because the manufacturing processes themselves create a lot of harmful residue. An example would be a lot of semiconductor manufacturing companies -- they have not-so-good environmental records.
Q: How do you go about determining if a company's manufacturing process, say, conforms to your criteria?
A: We actually are using databases that capture any kind of environmental infraction, but we also do visits and have meetings with management, which gets us all the information we need [usually]. I should also add that we have a full-time environmental analyst continually doing audits.
Q: What have been some stocks that you've sold recently, and why?
A: We recently sold a stock called Alteon (ALT). We talked to enough people -- doctors and analysts -- where we thought it was incredibly promising. In Phase 2 trials the results were negative, so we let it go and moved on.
Q: How many stocks do you hold, what are the assets of the fund, and is it open to new investors?
A: Our total assets are $200 million. We're open to new investors. The ticker is WGGFX, and it's available through most of the major platforms. Our strategy is concentrated -- we tend never to hold more than 40 names and usually between 32 and 34 names as we're selling things out and buying new positions.