AIM Charter Fund/A (CHTRX) seeks stable, competitive returns from companies that have temporarily fallen on hard times but still have sound fundamentals. As of Oct. 29, the $1.8 billion fund held 75 stocks, out of its universe of 350 large-cap stocks.
For the three years through last month, the fund returned 5.2%, annualized, nearly twice its peers' 2.7% gain. Year-to-date through October, it rose 2.3%, while its peers were up 1.8%. The fund is slightly less volatile than its peers and has significantly lower
portfolio turnover, 28% vs. 65%. Its expenses of 1.30% compare with the peer average of 1.15%. Based on risk-and-return characteristics over the last three years, Standard & Poor's gives the fund its highest rank of 5 Stars.
Ronald Sloan manages the fund in the same fundamental research approach he uses in running AIM Mid Cap Core Equity Fund/A (GTAGX) and AIM Premier Equity Fund/A (AVLFX). He feels the Charter Fund can offer stability to an investor with more volatile holdings.
Carol Wood of Standard & Poor's Fund Advisor recently spoke with Sloan about the fund's investing strategy and top holdings. Here are edited excerpts of their conversation:
Q: The AIM Charter Fund has existed since 1968. Did you make any changes when you took it over in January, 2002?
A: When I became manager, the fund had large-cap growth characteristics. Given its disappointing performance in 2001 and 2002, we decided to recreate it as a core fund, with an investment process similar to that of AIM Mid Cap Core Equity Fund.
Q: How would you describe your investment philosophy?
A: The fund is a core portfolio around which investors can build a more substantive, expansive portfolio. We want to provide something for folks to hang onto through thick and thin. Core funds provide ballast in an investor's overall portfolio and offer consistent, competitive returns. Steady-as-you-go performance does not go up as much in strong markets, but it also doesn't go down as much in weaker markets.
Q: What's your strategy?
A: Being a core fund, we follow a fundamental, research-driven style. Our research process has two parts. In the destruction phase of reading 10-Ks and 10-Qs, we try to understand what a company has done in the past. In the constructive phase, we build forward-looking models and talk to companies, industry experts, and Wall Street analysts. We come up with different price targets, which are a function of traditional valuation measures, such as price-to-earnings, price-to-book, and discounted cash flow. We get an idea of a company's earning power going forward.
Basically, we look from the bottom up for stocks that are cheaply priced, compared with their growth rates or future returns.
As lead manager, I make all of the buy-sell decisions. I have a team of five analysts who cover different sectors: consumer staples and pharmaceuticals; energy and media; retail and nonpharma health care, such as hospitals; industrials; and tech and telecom.
Q: Do you buy out-of-favor stocks?
A: We look for lower-risk companies with some future growth for a few years. When you pay less for growth, you're generally buying stocks that are out of favor.
Q: What are your buy criteria for stocks?
A: We want companies with projected
returns on invested capital greater than their cost of capital. The price target should be significantly above the current price.
The company should be in a business that we can understand. Because we buy things that aren't necessarily in favor, the better we understand the business, the better our analysis is likely to be.
We look for a catalyst, such as something that has hurt short-term returns but is likely to be temporary. Management should be fully committed to boosting the company's returns. We aren't interested in managements that drive companies into the ground.
Q: What are your sell criteria?
A: First, we have happy sales, where everything works. The stock reaches our target price, so we sell it for good money. We don't have to sell at the top tick to be happy.
Q: What about the unhappy sales?
A: We sometimes buy into unpleasant near-term news. We make bets on new managements, products, or growth rates that turn out to be bad. We try to fess up to our mistakes quickly, but it doesn't always happen that way.
Q: What's your cash position?
A: Cash is about 6%. It has ranged between 3% and 10% in the last three years.
Q: Do you hold any international stocks?
A: BP (BP) is a large foreign-based holding, and GlaxoSmithKline (GSK) has much of its business in the U.S.
Q: Do you avoid any sectors or industries?
A: We have been underweight in financial services, which hasn't helped us, as it has been a good group. I'm not sure I understand all of the derivative hedging by the big financial companies. These companies are leveraged 10 and 20 times. That's a lot of leverage, so you'd better be right.
Q: How do you manage risk in the portfolio?
A: It's easier for us to manage risk because we're not terribly aggressive. We set price targets and sell stocks when they get reasonably expensive. Rather than buy high and sell even higher, we try to buy low and make a decent profit.
Q: What are your top holdings and sectors?
A: Our top holdings are Microsoft (MSFT), General Mills (GIS), Pfizer (PFE), Glaxo, Tyco (TYC), and Washington Mutual (WM). Our top sectors are information technology, industrials, consumer staples, financials, and health care.
Q: Could you describe how one of your holdings reflects your investment style?
A: Microsoft, our largest holding, actually underperformed last year. But the beauty of Microsoft is that it grows all the time, though not at a very high rate. The software industry generates a lot of cash and has high gross margins. It's a relatively stable business, and Microsoft has a huge market share.
Q: Have you made any recent purchases?
A: We added to Computer Associates (CA) this past summer. We made a lot of money on it last year, when we sold about a third of our stake. We began buying it again, and it's now again one of our top 10 holdings.
Q: What's your outlook for the market and large-cap core funds?
A: I think large-cap core will be a good box to be in. We think the economy is O.K., but not great. The Fed has worked over the past few years to reflate the economy. Valuations won't have a lot of p-e leverage going forward, earnings growth will be more guarded, and investors who don't try to constantly hit home runs will be rewarded.