Mutual Funds
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Picky managers build a 'nest-egg' fund
Hancock US Global Leaders is a top-performing growth fund thanks to its concentration on a few quality stocks with global reach, pricing clout and steady revenue.
By Timothy Middleton
Financier Bernard Baruch once observed, It is unwise to spread ones funds over too many different securities. Time and energy are required to make sound investment judgments, and then to monitor them. While one can know all there is to know about a few issues, one cannot possibly know all one needs to know about a great many issues, he concluded.
The managers of John Hancock US Global Leaders Growth Fund (USGLX) agree. They own only 20 names currently -- McDonald's (MCD, news, msgs) was recently ejected when the fund decided its new managers were no better than those they replaced -- and seldom own more than 25.
We are tire-kickers, says George Fraise, co-manager of the $392 million portfolio. Im an analyst. Its not popular to say that these days, but thats what I was trained to do, and thats what I love to do.
Fundamental analysis seemed to go out the window in the late 1990s, when just about any technology stock doubled and redoubled, and this fund plodded. So the fund advanced less than 8% in 1999. But its strategy of owning only the most dominant corporations in the steadiest of industries was validated in the bear market. Although it declined 14.5% last year, that was better than 98% of large-capitalization growth funds. In all three years of the bear market, it did better than 99% of its rivals.
This fund is betting on the global consumer, says Marketa Larsenova, a fund analyst with Morningstar. Its prone to do better when people are retreating into areas where you can find true value.
A safer growth fund
Value is relative. This fund is much less risky than the average growth fund, but it's a true growth portfolio. The average annual earnings growth of the companies it owns is 8.3%, which is 26% more than the market.
Bringing down risk limits the funds upside in roaring bull markets, which were not apt to see anytime soon, but it sure pays off when the bear bites. And if the bear market taught us anything, its this: Its more important for the core of your portfolio to hold onto your money than to make the extra dime.
Unlike an increasing number of obscurely or misleadingly named mutual funds, this ones moniker captures its strategy perfectly. Shareholdings are limited to U.S.-based companies that have global franchises.
Fraise says companies have to meet three fundamental criteria to be considered for the portfolio:- Pricing flexibility, or enough market clout to charge a premium that supports strong profit margins,
- A high degree of recurring revenues, meaning they dont have to find an entirely new set of customers every year, and
- Global reach, or the ability to replicate the companys business model overseas.
No limitations
We want a business model with no cultural or geographic limitations, Fraise says.
An example of such a limitation is Ford Motor (F, news, msgs). Although its gas-guzzling SUVs epitomize Americas love affair with motoring, much of the world simply cant afford such a lifestyle. This is unlike Coca-Cola (KO, news, msgs), whose beverages are drunk everywhere in the world, the manager says. Coke is in the funds portfolio.
What we find is that as you put together a portfolio of companies, it becomes very concentrated, because very few companies meet the mandate for our portfolio, and we never relax those standards, Fraise says.
This leads to a portfolio of fewer than two dozen household names concentrated in consumer products, retailing, health care and insurance. The weighting of each issue is roughly the same as the others -- there are nearly as many assets in the bottom 10 holdings as in the top 10.
| Top holdings | | Rank | Company | % of total net assets | | 1 | Pfizer (PFE, news, msgs) | 6.52 | | 2 | Home Depot (HD, news, msgs) | 6.42 | | 3 | American International Group (AIG, news, msgs) | 6.03 | | 4 | Dell Computer (DELL, news, msgs) | 5.85 | | 5 | Merck (MRK, news, msgs) | 5.51 | | 6 | Staples (SPLS, news, msgs) | 5.40 | | 7 | Johnson & Johnson (JNJ, news, msgs) | 5.35 | | 8 | Starbucks (SBUX, news, msgs) | 5.07 | | 9 | Coca-Cola (KO, news, msgs) | 4.79 | | 10 | Colgate-Palmolive (CL, news, msgs) | 4.61 |
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Note: As of March 31.
Source: Hancock Funds
Recently, stocks like these have become the markets favorites. In the three months ended May 9, US Global Leaders has spurted 13.8%. Large-cap funds in general were in favor, rising 11.8% on average in the same period.
There are dangers to owning a concentrated fund, many of which melted down in the bear market. But thoroughly diversified funds are in danger of becoming closet index funds, except that they underperform their index by the amount of their own expenses. There's a considerable body of research indicating that a score of names is sufficient to diversify adequately.
New owner, new expenses
And speaking of expenses: This once independent fund was purchased by John Hancock Financial Services (JHF, news, msgs) last year, and shares that once bore no load now carry a 5% front-end sales charge. Thats bad for new investors but potentially good for the old ones: The funds below-average expense ratio of 1.38% could come down as assets grow. They have quadrupled since last summer.
The idea of owning a concentrated portfolio of global giants is hardly unique. Gartmore US Growth Leaders (GXXAX) is but one example among many. But the Hancock funds combination of a lengthy track record -- co-manager George Yeager has been implementing this style for 40 years -- consistent returns and lower-than-average sales charges help to set it apart.
In an age of increasingly fractured mutual funds targeting tiny niches, moreover, Hancock US Global Leaders is particularly appealing to investors who want only a few, or even a single, domestic equity fund. We call it the nest-egg fund, Fraise says. It is designed, he says, to be one of the foundation blocks of a long-term investment plan.
Battered as we have been by the bear market, its worth remembering that for a long-term financial plan, growth investments are indispensable.
What they're buying
Home Depot vs. Lowes: Lowe's (LOW, news, msgs) has become the markets favorite category-killer for home repairs, but Hancocks managers prefer Home Depot (HD, news, msgs). Over the last nine months weve doubled up on Home Depot stock as a result of its price decline, Fraise says. Lowes has had stronger same-store sales for more than a year, but its weak in the contractor business, which is the backbone of Home Depots business and, as Fraise says, is multiples larger.
Redefining Dell: The funds single technology holding, Dell Computer (DELL, news, msgs), isnt a tech company to Fraise. Its a distributor, very much like a retailer, of technology products, he says. It sells what the marketplace likes to buy. I can vouch for that: When shopping online for flash memory for my digital camera, I got the best price from Dell.
At the time of publication, Timothy Middleton didnt own any securities mentioned in this article.
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