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Chris Orndorff's Golden Fleece

Looking beyond heavily owned growth stocks pays off for Chris Orndorff, head of equities at Payden & Rygel and co-manager of the Payden U.S. Growth Leaders Fund (PUGLX). "I think a lot of the large funds tend to move like a herd of sheep," Orndorff says. "We are a little more nimble -- we can afford to be more original in our thinking."

Orndorff hunts for companies that are going to grow earnings more rapidly, regardless of what position those outfits might have in the index. This strategy has helped him steer the Payden U.S. Growth Leaders Fund above many of its peers.

This year through Nov. 30, the fund has risen 10.93%, beating an average return of 8.87% for mid-cap growth funds and 4.87% for the S&P 500 index. The portfolio's one-year and annualized three-year returns come in at around 15.3%, also above its peers and the broader market.

Payden U.S. Growth Leaders owns 65 names, which is a typical number for the fund. Top holdings include Halliburton (HAL), Burlington Resources (BNI), Prudential (PRU), and Cognizant Technology Solutions (CTSH). Orndorff does, however, own one of the most heavily owned stocks, Microsoft (MSFT).

Karyn McCormack of BusinessWeek Online recently spoke with Orndorff about his investing strategy and favorite stocks. Edited excerpts of their conversation follow:

What's your market outlook for 2006?

Next year is going to be much of the same. I don't think you're going to see very significant positive returns because there are a lot of headwinds that the market is going to have to overcome next year.

What are the headwinds?

The first is we believe that crude oil prices will go back above the old highs in the next six months. I think that interest rate increases are going to continue until the inflation rate starts to decline. Inflation is at a high level now.

Finally, on the spending front, federal government spending is going to decline as politicians have finally discovered that we have a budget deficit problem. And I think consumer spending is starting to trail off a little bit as many people realize that the game of using your home as an ATM machine, in the form of home-equity loans, is coming to an end.

So those headwinds are going to make for, I'm afraid, a rather uninspired year. I do think next year is going to be a little more volatile, though, than this year. One of the reasons is we'll have a new Fed chair.

I think the choice for the Fed chair was a good one. And while I think he's likely to follow many of the same policies of Chairman Greenspan, the style with which he's going to do it is going to be different than Greenspan. I'm fairly confident that at some point in the next year, he'll make some remark in some speech -- it probably won't be in a Congressional testimony, but somewhere in some location -- and the market will not interpret it the same way because they'll be thinking that he's going to use the words the same way Greenspan used them.

I think people should remember that Greenspan is not there, and there is a new person. While the policies may be the same, the style is going to be different, and that will create more volatility.

What's your investing strategy?

We are a little bit more defensive. We're overweight energy, since we think energy prices are going to rise again. We like certain selected financial services stocks and industries like insurance, asset management, and the brokerage business.

Also, I think selected areas in technology will do well, as businesses try to cope with not only inflation but also rising crude oil prices. One of the ways to cope with those rising cost pressures is to increase productivity, and the best way to do that is to invest in technology.

What are your favorite stocks in those areas?

In energy, we like some of the oil services and equipment names. I think Halliburton is a good choice in this environment.

In financials, I really like Prudential. I think it has improving fundamentals, good pricing, and it's very reasonably priced.

In technology, I'll give you one of my favorite picks: Cognizant Technology Solutions. It's an IT consulting firm and has a lot of its back office outsourced to India so it's another way to play the growth of India.

Another name in tech, and one of our more recent purchases, is Adobe Systems (ADBE). It's in the middle of a product upgrade cycle. It bought Macromedia, the flash people -- that acquisition closes this month or next month. We think both of those things will be catalysts for higher earnings.

Since the launch of the Xbox 360, do you think Microsoft (MSFT) will finally come out of the doldrums?

The price has gone up a fair amount. It's around $27.50-28.50. You've got real potential for it to go above $30 in the next couple of months. So I think we're definitely seeing a little bit of a shift in momentum. Also, it will be coming out with a new operating system at the end of the year, and that's going to be more of a catalyst for it.

I do think 2006 will be a breakout year for Microsoft. We think they should have one of the strongest years that they've had in several years, in terms of stock price return.

Do you still own Burlington Northern?

It's really a logistics company. Burlington Northern is the dominant player in the Los Angeles-to-Chicago route, which is really important because all that stuff that comes from China comes into Los Angeles, or into Los Angeles and Long Beach. A lot of it gets shipped by rail to Chicago and then distributed to the East Coast and all over the place. So Burlington Northern is really a well-positioned logistics company. It has a good management team -- they've done a great job raising margins -- and we like it very much.

Do you go off the beaten path?

One of the beauties of the mutual fund market is, as a financial consumer, if you look hard enough, you can find funds that are well designed and that can be tailored to your needs. I think a lot of the large funds tend to move like a herd of sheep. They all tend to buy the same names and all go to the same conferences and meet with the same companies, and all that kind of stuff. That lends itself to a kind of a herd behavior.

We're by no means small, but we're not Fidelity. We are a little more nimble -- we can afford to be more original in our thinking. We tend to look for names that are going to grow earnings more rapidly regardless of what position it might have in the index.

A good example of this is the company I was telling you about, which again is one of our top 10 holdings, Cognizant. It's a large-cap company -- it's got a market cap of $7 billion -- and we think it will grow significantly over the coming years. The way you make money in these kinds of things is you buy these companies that are in this size range and you ride them up -- to $20-, $30-, $40 billion -- which is where it will be at some point down the road, we believe, in terms of market cap.

In terms of our philosophy, we don't believe in following the line of everyone else. We don't believe in playing to the Morningstar ratings. We believe in trying to deliver the best returns possible for our shareholders.

If you had to name one or two things, what should investors watch for next year?

Be wary of the volatility. The Fed chair is going to be more significant than people think. That's No. 1.

No. 2 is the run up in crude oil prices. I think it's just an inevitable consequence of industrialization in China and India.

Thirdly, I would look at two of our neighbors and big trading partners, both of which are going to have changes in government next year. Canada is going to have a new premier and prime minister, and Mexico is going to have a new president. Those will both be, I think, significant events because we do a lot with them. Their policies toward the United States and our relationship with them influences our policies a lot -- a lot more than people think, I believe.

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