As the manager of a large-cap growth fund, Gary Rolle of Transamerica Premier Equity Fund/Inv (TEQUX ) keeps a relatively long-term investment horizon. His fund's annual turnover totals only 34% -- representing an average holding period of about three years per issue -- compared with an average of 87% for the peer group.
The $200 million fund returned 23.64% for the one-year period through Aug. 31, vs. a 12.55% gain for the S&P 500-stock index. The fund registered an annualized return over three years of 18.37%, compared with a 12.02% showing by the index. Over five years, the fund lost 4.21%, while the S&P 500 dipped 2.74%.
Volatility, as measured by standard deviation, comes in at 13.24, below the peer group average of 13.95. The fund also features an expense ratio of 1.29%, lower than the peer average of 1.44%. Based on risk and return characteristics over the last three years, S&P gives Transamerica Premier Equity Fund/Inv its highest rank of 5 Stars.
In March, co-manager Jeffrey Van Harte left the fund and moved to Delaware Investments. Rolle says this change didn't affect the fund's investment strategies. Carol Wood of Standard & Poor's Fund Advisor spoke recently with Rolle about his investing strategy. Here are edited excerpts of their conversation:
How would you describe your investment philosophy?
We're a concentrated growth fund that relies upon our own bottom-up intensive research. We do use Wall Street and outside information sources, but more as a filter.
We're looking for industries and companies where we perceive positive changes in management, in the business environment, or in new products. We also look for highly competent managements who are visionaries, have a strong track record, and will likely outperform their peers as they implement their business plans.
We invest in companies that generally have a low cost of capital and a high return on capital, which provide them with growing free cash flow. We buy good or great assets at a fair price. We're not a value investor, but we know that valuations can go to ridiculous levels when trends are very hot. We have low turnover that usually falls between 25% and 40%, and we typically hold between 25 and 35 names.
What's your investment strategy?
We bring ideas to the table by involving all 14 investment professionals who work on the Premier Equity funds. Each senior member of this team manages money, so when a name comes up, if it fits their product, they can purchase it or not after we discuss it. In this fund, I make the final decision.
We also attend industry conferences, meet with company managements, and come up with an overlying theme of where the economy is going and where we might find opportunities. These themes can be demographic, or they may relate to technology or productivity-enhancing developments in logistics and outsourcing.
We look for areas of the economy that are likely to grow. That's why, for example, we hold Qualcomm (QCOM ). With its intellectual property in the growing CDMA [code division multiple access] market -- it designs and has patent rights to the chips -- anyone who uses those patents needs to pay them. As such, they have a very high-return business model.
What are your buy criteria?
9 The first thing we look for in buying a stock is an unexpected acceleration of cash-flow growth. Management's track record is another. If there's a change in management, we analyze how that could present an opportunity. They have to be highly ethical and sensitive to shareholders.
Does that put you in the socially responsible camp?
No, but a short-term focus on shareholders is not what we're interested in. We're looking for a long-term investment, which involves employees as well as shareholders. Corporate culture is very important to us. For example, we like Harley-Davidson (HDI ) for the way they view their distribution system and customers. The whole structure of the company moves forward together.
When do you sell?
We don't have a clear formula of when to sell a stock. But we would do so when we find a better issue, are disappointed with management's prospects, or see any radical change in fundamentals. If a stock becomes clearly overvalued, we would sell for diversification purposes.
How do you manage risk in the portfolio?
We compare our diversification with that of the S&P 500, and we like to have less than 25% of our assets in any particular sector. We will not invest more than 5% of assets in a single security, and we start trimming when the holding gets to 6% to 8%.
What are your top holdings and sectors?
As of July 31, our top five holdings were Genentech (DNA ), Qualcomm, WellPoint (WLP ), Chicago Mercantile Exchange Holdings (CME ), and Microsoft (MSFT ).
Our top sectors comprised consumer discretionary (23% of the fund), information technology (22.7%), health care (17.4%), consumer staples (10.2%), industrials (10%), financials (7.6%), and energy (5.1%).
Which of your sectors have done the best over the last three years?
Health care. We've owned WellPoint, a managed care company, and Zimmer Holdings (ZMH ), which makes artificial knees and spine medical implants -- sales of artificial knees are growing 25% a year. We also own Genentech and Allergan (AGN ), which makes Botox and other skin-related pharmaceuticals.
We have avoided the pharmaceuticals, consumer nondurables, and retail sectors.
Were there any recent changes to the portfolio?
In the first quarter, we finished selling Lexmark International (LXK ). We have begun to buy Caterpillar (CAT ), Suncor Energy (SU ), and Schlumberger (SLB ).
Do you have an outlook for your asset class?
I think large-cap growth will outperform in the second half of this economic cycle, especially as interest rates go up. Rising rates have a more negative effect on smaller companies.
Also, the larger companies can take advantage of the worldwide market as the dollar weakens. For example, companies like Caterpillar are already building capacity worldwide, while Jacobs Engineering Group (JEC ) is getting order growth at 20%.
Where are we in the economic cycle?
We are one-half to two-thirds of the way through a typical cycle. We assume that every cycle will be the longest in history, so we don't get whipsawed -- where we sell and have to buy again. We're not trying to trade on short-term momentum.
We believe the economy will remain strong through the first half of next year. Orders have picked up across the country, especially in capital goods. People are starting to talk about expanding purchases of telecommunications equipment, computers, and new facilities.
The commercial- and hotel-building booms haven't occurred yet. So companies like Marriott (MAR ) are making a lot of money right now and will for another three to four years, when many more hotels are constructed. The bottom line is that we might have low rates for another half a decade. We could have a very long cycle.
Are you taking into account what's happening in Iraq?
Taking into account what we hope will happen in Iraq -- that there will be peace, while U.S. expenditures for war will be reduced and diverted to internal uses. We're always thinking of things that can occur that will give us another leg for growth.