A Talk with ABN AMRO's Thyra Zerhusen
Thyra Zerhusen, manager of the ABN AMRO Mid Cap Fund (CHTTX), takes pains to know the ins and outs of the portfolio's 40 stocks. "We want to know and understand what we own," she says. Though she had a disappointing showing in 2005, up only 1.3%, her fund is bouncing back this year thanks to rebounds in some of last year's poor performers. Her long-term record has landed her on the Standard&Poor's/BusinessWeek Excellence in Fund Management Award list for the second year in a row.
She thinks mid-sized companies, especially in technology, are still strong contenders, given higher growth rates than larger ones and not as much money chasing them. The fund's top holdings are Readers Digest (RDA), FMC Technologies (FTI), Unisys (UIS), Andrew Corp. (ANDW), CNF (CNF), Biomet (BMET), Borg Warner (BWA), Chicago Bridge & Iron (CBI), New York Times (NYT), and Pearson (PSO).
Karyn McCormack of BusinessWeek Online recently spoke with Zerhusen about her fund and her strategies. Edited excerpts of their conversation follow.
Thyra, you've made our list of best fund managers again.
Really? I underperformed last year.
About 40% was because I had nothing in utilities and was underweighted in energy and financial stocks. We're always underweighted in energy and financials. Last year, those three were really strong segments. If you weren't overweight in energy you underperformed the index.
Commodities also did very well -- steel prices were up. We stay away from cyclical stocks and regulated-industry stocks. We're always, [or at least] most of the time, significant in technology and consumer durables.
In technology, we had some problems, and the biggest was Unisys (UIS) -- a longtime holding that was very disappointing. The space was soft and competition was tough. It had two large contracts coming due, one of them has been repriced but the other is still being working on. It also has pension problems. In December, I bought on dips, and since the lows it has done well, so we're getting some benefits finally. Year-to-date, it's up 14%, and it was up another 3% today [Mar. 14].
Why do you think investors should consider mid-cap stocks, even after their healthy run?
It's really an attractive sector, because if you compare it to the S&P 500 large caps, you can get good entry points when valuations are lower, and there isn't as much money following these stocks. A lot of times you get companies that are inefficiently-priced. Sometimes they're spun off and may be forgotten.
Can you give me an example?
Bunge (BG) hasn't done well recently, but it has done well since we bought it. It's an agricultural company, primarily in soybeans, making edible oils, some fertilizers. It's a 100-year old company but was private until sometime in 2001 when it went public. We bought it not too long after that, in 2002, for around $17. Now it's about $50. It has had a pretty good run. We have a smaller position now.
Are there any new additions?
Something new that we bought mid last year is Biomet (BMET). It makes knee and hip implants, and some other surgical products. The price isn't that different from when we bought it. It has a very good balance sheet, nice return on equity, good management, and we think the demographics are good.
Biomet is founded by an engineer, so it's a very good bioengineering company, and we checked with an orthopedic surgeon about its products.
What's your discipline for buying and selling?
We look at fundamentals bottom up, one by one. We keep names until they reach a level that we consider overvalued. In most cases it's a run up to the upper ranges of valuation, based on price-to-cash flow, and p-e's. We have about 30% turnover.
Another discipline is we want to know and understand what we own. Sometimes our market analysis is wrong. It's rare that it's valuation that causes us to sell.
What do you do differently than other managers? We look for opportunities where you can't use databases to squeeze out ideas. We like to find something that's inefficient or where maybe they had a problem recently.
You get to know company management?
We talk to them and know whether we can trust them.
Why is Reader's Digest (RDA) your top holding?
It's a really good question. It's because of valuation. It has a dividend yield of 2.7% -- not too shabby. I like that. The price-to-cash flow at 9 times is pretty attractive. Its balance sheet is much improved. Return on equity is good. Price-to-sales is 0.6. The market cap is $1.4 billion.
I'm not excited about it. International isn't doing badly. It has a proprietary mailing list, and it has information about what subjects its readers like, and they use it to market books and other products to them.
I thought the company might get into China, but that isn't happening -- China is reluctant to let anyone in. That's why it has been stagnant. I'm a little frustrated with it. I've got to call them. There's just not much downside here. It's sort of a sitting duck. There has been a change in CEO, but I haven't met him yet.
What's your outlook?
I feel better about the market this year. Last year, you had to be overweight energy, financials, and homebuilders. I hear the money flows are going into financials. I think with interest rates going up, that will stop.
That would help me. I think money will flow back into technology because there's pent up demand. I think I will do pretty well.