"Growth Stocks In Disguise"
David Kahn and Donald Bessler, managers of the $124 million Managers Capital Appreciation Fund, focus on large-cap stocks, but they've spiced up their portfolio with some midcaps and beaten-down growth names. Considerably more volatile than its peers, Managers Capital Appreciation is up 26.6% through Aug. 31. Kahn and Bessler signed on last October when their Santa Monica, Calif., firm, Roxbury Capital Management, was hired as an adviser to boost the fund's large-stock holdings. Since then, the average market value of the stocks in the fund has risen from $29.7 billion to $69.8 billion. Roxbury manages 46.8% of the portfolio; Boston-based Essex Investment Management, which has a mandate to invest in companies of all sizes, runs the rest. Kahn and Bessler talked recently with Bill Gerdes of Standard & Poor's Fund Adviser (www.personalwealth.com):
Q : How do you invest for the fund?
KAHN: We look for market leaders with sustainable earnings growth of 16% to 18% [a year] and higher. Returns on capital drive shareholder value....Our emphasis on return on capital allows us to look beyond accounting distortions, such as pooling of assets, to get at a company's instrinsic value. We tend to have a concentrated portfolio of 30 to 35 names to overweight our best ideas. Roughly 15% of the [Roxbury-managed] portfolio is in special situations and companies with market caps of $3 billion to $10 billion.
Q : What are the market leaders in the portfolio?
BESSLER: In retailing, for example, one of our largest positions is Home Depot. Costco is a recent addition. [Both] are category killers with the best management in their subsectors. We like CVS. It has a very focused management.
Q : What are some of your special situations and midcap holdings?
KAHN: The special situations are growth stocks in disguise--companies with great businesses clouded by poor assets. CBS, with its outstanding radio business and relatively lackluster TV performance, is an example. With midcaps, we look for tomorrow's growth leaders. Our midcap growth holdings include Capital One Financial and Cardinal Health.
Q : Do you follow any particular theme?
BESSLER: The convergence of technology, media, and communications is a major theme. A bevy of companies is fighting for access to the consumer. We don't think we can pick the winners of that battle, but we feel comfortable with infrastructure companies and content providers. Our infrastructure holdings include Sun Microsystems, Cisco Systems, and Oracle, and our content holdings include Liberty Media and Yahoo! We're convinced there is a shortage of good content.
Q : What are the fund's sector weightings?
KAHN: Some 46.8% in technology, 10.5% in consumer staples, and 10.1% in communications.
Q : What are the largest holdings in Roxbury's part of the portfolio?
KAHN: Sun, Texas Instruments, Cisco, CBS, and Intel. One of our convergence plays, Texas Instruments, has changed from a diversified technology company to become the leading producer of digital signal-processing chips. Cell phones, modems, and Internet devices all use these chips.
Q : What have you bought recently?
KAHN: Amgen. It has an accelerating return on capital, and we expect its revenues to double in four years. It's introducing a new drug called IL1RA, for rheumatoid arthritis.