Mutual Funds
Recent articles:
• Win the fight against fat fund fees, 2/1/2005
• Take the back door into closed funds, 1/25/2005
• Move over, value: It's growth's turn again, 1/18/2005
More...
| | Mutual Funds
A hot fund that plays cold sectors
Where other growth portfolios stumble, GKM Growth Fund shines, making money for shareholders with its expert stock-picking skills.
By Timothy Middleton
The most popular mutual funds of all, big-capitalization growth funds, have been the worst performers for the last year. They've eked out a gain of 2.6%, only about one-quarter the market's advance.
That's largely because the two best-performing sectors of the last year, energy and utilities, are absent from typical growth portfolios, whereas the two worst-performing groups, technology and health care, are growth staples.
But GKM Growth Fund (GKMGX) sprinted ahead 8.9% in the last year, despite shunning the hot sectors and embracing the cold ones, which together account for half the fund's assets.
"We're looking for great, growing consumer franchises, across all industries and all market caps," says co-manager Timothy Wahl.
GKM is a "friends and family" fund, started for relatives and heirs of clients of Los Angeles-based money manager GKM Advisers who can't meet the firm's minimum of $1 million. The fund was launched at the end of 2001, but its other co-manager, Jed Cohen, has been managing money in the same style for more than 40 years.
In its brief life, the fund has amassed an astonishing record, ranking among the top 2% of funds in Morningstar's large-growth category. Lipper rates it among the best funds of its type in terms of total returns, consistency of returns and tax efficiency.
A costly fund
About the only place it falls down is in terms of its expense ratio, which is 1.42%. That's at least half-again as much as I like to pay for such a fund, but it's a function of the portfolio's extremely small size; assets are less than $30 million.
But this is one of those rare cases where a fund, while expensive, is worth the price. The managers aren't gouging, and they are shareholders themselves. Wahl has all of his retirement assets in the fund.
GKM's strategy is to buy stocks that'll benefit from what it calls structural changes. "That leads to what I won't invest in, as well as what I will invest in," says Jed Cohen, the senior of the two managers.
Related mutual fund resources
Airlines and autos, for example, are on the wrong side of a structural economic shift from high- to low-cost producers. "I haven't spent a penny in those areas in many, many, many years," says Cohen. "These industries are excessively labor intensive and management has been irresponsible in regard to wages and benefits."
But Garmin (GRMN, news, msgs), while a supplier to Detroit, is on the right side of another shift, the productivity revolution. Garmin exploits global-positioning-system technology to tell limo drivers and pilots where they are. Over the last three years, sales and profit have grown at an annual rate of nearly 20%.
Paying up
Garmin's stock isn't cheap -- its price is about 30 times its trailing earnings, well above the market average. But GKM is a true growth fund, willing to pay a premium to buy companies it expects to grow at three or four times the average.
| GKM Growth top holdings | | Stock | Sector | P/E | | Harman International Industries (HAR, news, msgs) | Consumer goods | 49 | | Scotts (SMG, news, msgs) | Consumer goods | 23 | | Microsoft (MSFT, news, msgs) | Technology | 36 | | Trimble Navigation (TRMB, news, msgs) | Technology | 29 | | Manpower (MAN, news, msgs) | Business services | 18 | | Adobe Systems (ADBE, news, msgs) | Technology | 37 | | Novartis (NVS, news, msgs) | Health care | 24 | | Qualcomm (QCOM, news, msgs) | Technology | 35 | | Affiliated Computer Services (ACS, news, msgs) | Business services | 14 | | Bear Stearns (BSC, news, msgs) | Financial services | 11 |
|
Note: As of 12/31/2004
Source: Morningstar
Garmin is one of more than 80 names the fund owns. It doesn't concentrate on individual bets; the top 20 names represent about 25% of the portfolio.
GKM Growth is a buy-and-hold investor. Portfolio turnover during its first three years has averaged about 4%, implying a typical holding period of 20 years. "We like to say that we make Warren Buffett look like a day-trader," Wahl says.
It's impossible for a fund to combine low turnover with superior returns unless its stock-picking is brilliant.
Counting costs
This isn't to say that high-turnover funds can't produce superior results; momentum investors are constantly dumping played-out stocks for up-and-comers.
But high turnover creates trading expenses, which subtract directly from returns, and capital gains, which are taxed even if distributions are reinvested.
As I've written before, friends-and-family funds are a way for ordinary investors to hire the services of private money managers, who tend to take a much longer-term view of investments than the typical fund manager.
As I've also written, the growth style of investing is due to outperform over the next five years. One way to find the great growth funds is to examine how they do when their style is out of favor. GKM is a standout on that basis.
At the time of publication, Timothy Middleton owned the following securities mentioned in this article: Microsoft.
|
