Ericksen on Top as Berkowitz Whipsawed Shows Challenges

Repeating Top Returns Eludes Yacktman as Ericksen Handles Swings
Traders on the floor of the New York Stock Exchange. Photographer: Scott Eells/Bloomberg

As Bruce Berkowitz and Donald Yacktman were whipsawed by market swings in the past 15 months, a handful of managers guided their mutual funds to top ranks in both 2011 and 2012.

They’re led by Christopher Ericksen and his colleagues at Delaware Investments, who run the $742 million Delaware Select Growth Fund, one of two diversified U.S. stock funds with at least $500 million in assets that ranked in the top 10 percent in their categories both years, according to data compiled by Morningstar Inc. The $10.8 billion Wells Fargo Advantage Growth Fund is the other. Five additional actively managed funds out of a total of 843 were in the top 15 percent for 2011 and for this year through March 27.

Managers have struggled to stay on top because markets rewarded different stocks each year. In 2011, fear of a global slowdown drove investors to the safety of big companies, utilities and consumer staples. In this year’s first quarter, growing confidence in the economic recovery helped smaller firms, banks and technology companies. The swings pushed Berkowitz’s Fairholme Fund to the bottom of the rankings last year and to the top in 2012, while Yacktman’s main fund is trailing rivals now after beating them in 2011.

“Last year was all about being defensive,” said Jack Ablin, chief investment officer at BMO-Harris Private Bank, where he oversees $60 billion. “This year the riskier plays are starting to bloom.”

The managers who thrived in both years look for companies that can increase earnings in any environment, and they don’t try to predict shifts in the economy or markets.

Gross’s ‘Clarity’

“We don’t have Bill Gross’s piercing clarity on the macro situation,” Ericksen said in a telephone interview from San Francisco. “For us, what matters is getting the business right.”

Stocks that helped Delaware Select Growth, Wells Fargo Advantage Growth and several of the other winning funds include Apple Inc., Inc. and MasterCard Inc., which all gained more than 75 percent since the end of 2010 as profits climbed, according to data compiled by Bloomberg.

By contrast, Berkowitz, named Morningstar’s domestic stock manager of the decade in 2010, bet that banks and insurers that survived the 2008 financial crisis would prosper. That backfired in 2011 as his $8.2 billion Fairholme Fund lost 32 percent, trailing all rival funds last year, Morningstar’s data show.

Berkowitz, Yacktman

This year the fund rose by 31 percent, better than 99 percent of large-cap value peers, with many of the same holdings. Charlotte, North Carolina-based Bank of America Corp. has soared 75 percent in 2012 after tumbling 58 percent last year. Financial stocks, the worst performers among the 10 industry groups in the Standard & Poor’s 500 Index in 2011, are the strongest group this year, data compiled by Bloomberg show.

Berkowitz declined to comment, Hedda Nadler, a spokesman for the Miami-based fund manager, wrote in an e-mail.

At the other end of the spectrum, Yacktman’s $5.9 billion Yacktman Focused Fund gained 7.4 percent in 2011, ahead of 94 percent of rivals who pick a blend of large-cap growth and value stocks, as blue-chip holdings such as Atlanta-based Coca-Cola Co. rose in a market that was little changed.

This year, Coke has failed to keep pace with market gains and Yacktman is trailing 96 percent of peers, Morningstar data show. Trailing competitors for a quarter isn’t significant, Yacktman said in a telephone interview from Austin, Texas.

“We don’t think in these short time horizons,” he said. “We are 10-year investors.”

‘Greatest Businesses’

Yacktman Focused Fund returned an average of 12 percent annually for the past 10 years, better than 99 percent of large-cap blend funds, according to Morningstar.

“Our top positions continue to be in some of the greatest businesses in the world,” Yacktman wrote to shareholders in a year-end letter posted on the fund’s website.

Ericksen is part of team of money managers who joined Philadelphia-based Delaware in 2005. The group, which oversees about $17 billion, seeks to buy companies with fast-growing free cash flow that are selling at bargain prices.

One of those stocks is MasterCard, the second-biggest payments network after Visa Inc. Shares of Purchase, New York-based MasterCard have climbed by 91 percent since the end of 2010 and are up more than 10-fold since a 2006 initial public offering.

Electronic Shift

MasterCard, the second-biggest position in Delaware Select Growth Fund as of Dec. 31, is benefiting from a global shift toward electronic payments by consumers. Cards will continue to gain market share in the U.S., he said, and have still more room to grow in the rest of the world. MasterCard’s cash from operations grew 58 percent last year, data compiled by Bloomberg show.

Delaware Select Growth beat 98 percent of mid-cap growth funds in 2011, 97 percent this year, and 96 percent over the past five years, Morningstar data show. A second fund run by the same team, the $1.4 billion Delaware Smid Cap Growth Fund, topped 99 percent of mid-cap growth peers in 2011, 88 percent this year and 97 percent over five years.

Thomas Ognar owns MasterCard in his Wells Fargo Advantage Growth Fund, which outperformed 99 percent of large growth funds in 2011 and 91 percent this year. Over 10 years it topped 99 percent.

In the fund’s annual report in September, Ognar said he tries to buy “underappreciated” companies that can increase revenue and earnings “even if the broad market falters.” Apple still meets that definition, he said last week in a telephone interview from Menomonee Falls, Wisconsin, even as it gained 26 percent last year and 53 percent in 2012.

“The price of the stock keeps going up but the valuation keeps going down,” Ognar said.

Apple’s Valuation

Apple sells for 18 times trailing earnings, down from a 43 price-earnings ratio at the end of 2007. In its most recent quarter, Apple’s revenue jumped by 73 percent from a year earlier because of surging demand for the iPad and iPhone.

Among repeat performers in the top 15 percent of their categories, the $2 billion Touchstone Sands Capital Institutional Growth Fund has outperformed by owning Apple, Priceline of Norwalk, Connecticut, and San Francisco-based Visa, which has benefited from the same trends that lifted MasterCard. Visa shares are up by 70 percent since the end of 2010.

The fund looks for the same type of stocks regardless of the economy, portfolio manager Frank M. Sands Jr. wrote in a fourth-quarter report to shareholders posted on Touchstone Investments’ website. Target companies, he wrote, “tend to be game-changing businesses that are creating new markets or innovating within existing markets.”

Mathematical Models

Sands declined to comment for this story, Jami Schlicher, a spokeswoman for Cincinnati-based Touchstone, wrote in an e-mail.

Touchstone Sands bested 88 percent of large-cap growth funds in 2011, 99 percent this year and 99 percent over five years, according to Morningstar.

The $3.7 billion Columbia Large Core Quantitative Fund uses mathematical models to identify stocks that have strong balance sheets, attractive prices and catalysts that can drive shares higher, portfolio manager Brian Condon said in a telephone interview from Boston.

The fund, whose top holding is Apple, beat 96 percent of large blend funds in 2011 and 86 percent this year.

One large-cap stock that hasn’t worked for a number of the successful growth managers is Google Inc. Shares of the Mountain View, California-based company have risen by less than the S&P 500 Index since the end of 2010. In January, the owner of the world’s most popular Internet search engine reported fourth-quarter revenue that fell short of analysts’ estimates, suggesting that stalled economic growth in Europe crimped advertising sales.

Giving Google Credit

Investors aren’t giving Google enough credit for its expansion into new areas such as mobile search, said Delaware’s Ericksen, who has the stock among his top 10 holdings.

“No one can claim they are a one-trick pony anymore,” he said.

Craigh Cepukenas, one of the managers of the $540 million Artisan Small Cap Fund, employs a similar strategy to other growth investors, looking for firms that can expand faster than competitors. His fund beat 98 percent of small growth peers last year and 89 percent this year, according to Morningstar.

“If the economy is improving, that’s great, but if it is not these firms should still grow,” he said in a telephone interview from Milwaukee.

Ulta Salon Cosmetics & Fragrance Inc., a Bolingbrook, Illinois-based retail chain that sells makeup and hair-care products, fits that profile. The shares have almost tripled since the end of 2010 as the firm added more stores.

‘Be Rewarded’

Even when markets seem to be highly correlated, “if you identify companies that can deliver strong results, you will be rewarded,” Bruce Aronow, a manager of the $717 million AllianceBernstein Small Cap Growth Portfolio, said in a telephone interview from New York.

Shares of the fund’s largest holding, Minneapolis-based mattress maker Select Comfort Corp., have more than tripled since the end of 2010. The explanation is simple, Aronow said: Earnings last year came in at $1.07 a share, compared with a consensus estimate from analysts of 72 cents at the beginning of 2011, he said.

Aronow’s fund beat 95 percent of small-cap growth competitors last year and 85 percent this year.

Given the turbulence in global markets and economies, performing near the top of the pack in 2011 and 2012 was difficult, said Michael Mullaney, a portfolio manager with Fiduciary Trust Co. in Boston, where he oversees $9.5 billion.

“The managers who did it are few and far between,” he said.

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