As growth and value areas of the market drift in and out of favor, a blend strategy often yields the best long-term results, says Matti von Turk, manager of the American Century Small Company Fund (ASQIX). When markets inevitably overreact, she believes such a strategy can take advantage of the resulting market inefficiencies and anomalies.
To further dampen market volatility, von Turk uses a quantitative investment approach, focusing on earnings acceleration, price momentum, and valuations. In addition, she selects a broad number of holdings, ranging from 200 to 300 stocks.
Von Turk's approach has succeeded during this year's rally as well as over the recent bear market. In 2003 through September, the fund rose 29.5%, vs. a 26.5% gain for the average small-cap blend fund. For the five-year period through last month, the fund was up 12.9%, on average, compared with a 9.8% rise for its peer group.
Based on risk and return characteristics over the last three years, Standard & Poor's gives American Century Small Company its highest overall rank of 5 Stars. Bill Gerdes of S&P's Fund Advisor recently spoke with von Turk about the fund's strategy. Edited excerpts from their conversation follow:
Q: What's your basic investment philosophy?
A: We look to exploit inefficiencies and anomalies in the market using a multifactor quantitative strategy. We strive for a balanced stock-ranking model that's style-neutral. Our stock-ranking model balances measures of value and growth. When evaluating stocks, we consider earnings acceleration, price momentum, and valuations.
Q: Is the fund currently tilted more toward value or growth?
A: Our approach gives us equal weightings of growth and value. We build the portfolio based on an unbiased and stable view of the world. Sometimes, momentum or value is in favor, but we stick with a rational view of the market. Then, as investor attitudes shift, we're able to recognize pockets of value as they occur.
Q: Is the fund over- or underweight in any sectors as a result of your process?
A: We have some slight industry and sector weights, but they're strictly an outgrowth of our stock-selection process. Our biggest underweights are stocks in our benchmark, the S&P SmallCap 600-stock index. Our picks from outside the benchmark are where we find the most value, the most bang for the buck.
Q: What are the fund's largest sectors?
A: Technology, consumer cyclicals, financials, and health care. Our weightings are within 2% of the benchmark. Technology is our biggest underweight relative to the benchmark.
Q: Has your process uncovered any broad economic trends?
A: The homebuilding trend. The stock-ranking model has favored homebuilders, title-insurance companies, banks, and thrifts that are involved in homebuilding loans. Holdings in these areas include Fidelity National Financial (FNF), First American (FAF), and Ryland Group (RYL).
Q: How many holdings does the fund typically have?
A: About 200 to 300 names. We make a lot of little bets. We feel we're good stock-pickers, but you're usually better off spreading your bets across many holdings.
Q: Why has the fund had strong performance in recent years?
A: Our technology holdings helped us -- more than 1.5% of our outperformance came from the technology sector. Our tech allocation was flat relative to the index, but we picked the right stocks. We're also slightly overweight in basic materials. One of our largest holdings, United Stationers (USTR), also helped returns.
Q: Why has your longer-term performance been strong?
A: Our industry-neutral approach keeps us from being dragged down more than the benchmark. We've also benefited from holdings outside our benchmark.