By Palash R. Ghosh The Putnam Vista Fund/A (PVISX) is managed by a former fundamental research analyst and a former quantitative analyst. As a result, stock picking in this $2.8-billion portfolio reflects both investment methodologies.
Kevin Divney, the ex-quantitative research analyst, identifies what he terms "inefficiencies" in the equity markets that can be exploited. Partner Paul Marrkand is the former fundamental analyst.
"Essentially, we look for growth and combine that with a heavy emphasis on quality and valuation," Divney says. He acknowledges there are strengths and weaknesses to both approaches -- fundamental and quant -- "but if you leverage both methods and integrate, you will likely generate more consistent outperformance over time," he asserts.
BALANCED DESIRE. For the one-year period ended May 31, the fund gained 12.9%, vs. 8.1% for the average midcap growth portfolio. For the three-year period, it registered an average annualized return of 6.5%, vs. 6.0% for its peers. However, those results were achieved with greater volatility.
As co-chief investment officers of Putnam's midcap growth team, Divney and Marrkand oversee a total of $8.5 billion in assets, including institutional products. Divney and Marrkand also co-manage the Putnam New Opportunities Fund/A (PNOPX). Both this fund and Vista are ranked 3 STARS by Standard & Poor's.
"A lot of growth investors don't focus on quality and valuation," Divney notes. "It's very difficult to assign a valuation target on a company that's growing swiftly, because there are many uncertainties, and, consequently, a high degree of error in making forecasts. We balance our desire for high growth with attractive valuations and quality management and business models."
TOP HOLDINGS. The fund invests in midcaps across an array of industries. Typically, stocks in the portfolio are relatively well-established but continue to provide high annual growth and earnings visibility. Divney and Marrkand have a universe of about 1,400 stocks from which to select, with market caps between $1 billion and $10 billion. They will, however, go above or beneath that range as long as a company remains an attractive investment.
As of May 31, the fund's top 10 holdings were Linear Technology (LLTC), Citrix Systems (CTXS), Claire Stores (CLE), United Defense Industries (UDI), C.R. Bard (BCR), Veritas Software (VRTS), Bear Stearns (BSC), Varian Medical Systems (VAR), WellPoint (WLP), and Sandisk (SNDK). These represented 19.82% of the portfolio's assets. The fund currently holds 107 stocks, but typically keeps about 90 positions.
The top sectors in the portfolio were technology (28% of the fund), health care (19%), consumer cyclicals (16.5%), financials (9.2%), capital goods (8%), and consumer staples (7.7%).
SECTORS OF CHOICE. While the stock-picking process is strictly
bottom up, the fund seeks to closely match the sector weighting of its benchmark, the Russell Mid-Cap Growth Index, over the long term to control risk. As a result, Divney explains, the top 10 holdings don't necessarily represent the managers' favorite picks.
Technology, health care, and consumer cyclicals will always dominate the fund, Divney says, since these sectors tend to be well represented in the midcap area. Divney, Marrkand, and their team of analysts spend most of their time researching these three industries.
Within the tech sector, the fund has consistently kept an overweight position in software. Divney says these outfits tend to enjoy strong operating leverage and margins that can expand as they grow.
TECH PICKS. One of his favorites is Adobe Software (ADBE), known for its Acrobat downloading product. "This company will continue to grow. Their proprietary products are entrenched and have become the standard," Divney says. "Aside from Acrobat, they also have Illustrator, Photoshop, and Premiere, among others. Adobe has also competed against Microsoft (MSFT) successfully."
Divney also likes McAfee (MFE), the antivirus software maker, as well as Symantec (SYMC), which is about to merge with Veritas Software. "We think the proposed merger with Veritas is strategically sound, although the market hasn't yet fully appreciated its value," Divney says.
The managers are currently underweight semiconductor stocks, although the fund's top holding, Linear Technology, makes chips. "The semiconductor industry has such a cyclical nature that it makes it hard to predict future growth trends," Divney says. "Moreover, this sector seems to be too much influenced by investor sentiment." However, he adds that Linear Technology is "more diversified than its competitors, and their returns-on-capital have been attractive relative to peers."
BOREDOM THRESHOLD. The fund currently has a neutral weighting in the health-care sector. Here, Divney has been overweight in managed care, including Wellpoint and PacifiCare Health Systems (PHS). "Some of our analysts believe managed-care stocks are overvalued, and they're worried about potential regulatory risks, as well as a consolidation process in the industry," he says. "However, one thing that distinguishes the managed-care industry is that it has robust pricing power. The possible impact of regulatory risks haven't occurred yet."
Also within health care, Divney likes the "boring" medical-devices sector, including stocks of companies such as CR Bard and Dade Behring Holdings (DADE). "These companies have very visible earnings streams, they're gaining market share, and they possess good economies of scale," he notes.
Some of Divney's favorite holdings actually represent small percentages of the fund's assets, reflecting underlying risks. He cites XM Satellite Radio Holdings (XMSR), a relatively new company that provides music, entertainment, and other types of programming that customers can receive in their cars, home, portable radios, or over the Internet. "XM Satellite won't be in our top 10 because it's too risky, but it's an exciting company," he says. "It could turn out to be what cable TV was in the 1970s."
The fund's annual
turnover rate, 78%, falls below the peer group's average. The managers typically do small trades in and out of positions. "We trim back, rather than make outright dispositions," Divney says. "Very rarely would we make an outright disposition."
If Divney and Marrkand are right, this custom blend of approaches could continue to pay off. Ghosh is a reporter for Standard & Poor's Fund Advisor