STATE STREET RESEARCH MID-CAP GROWTH FUND
When Catherine Dudley joined State Street Research in 1998, the fund was undergoing big changes. In March, the fund was renamed the Mid-Cap Growth Fund and right along with that name change came a new investment style.
Good timing. Mid-cap growth funds have been one of this year's top performing categories, according to Lipper Inc. Year-to-date through Sept. 30, the average mid-cap growth fund was up 12.4 percent while the average equity fund was up 6.5 percent.
In addition, mid-caps aren't always followed closely on Wall Street.As a result, like the middle child in a family, their dynamics can be exciting and often overlooked.
Here's more about how Dudley manages the Mid-Cap Growth fund:
Q: What kind of changes did State Street Research want you to make in the fund?
Dudley: Prior to my taking over as portfolio manager, it had been more of a multi-cap fund with some large-, small- and mid-cap names, along with some turnaround situations and aggressive growth stocks in it. It had a kind of eclectic style. I was to focus it.
Q: How did you do that?
Dudley: The two big things I had to do was get it to be a mid-cap fund and a growth fund, so there was a lot of restructuring to do.
That restructuring took place from November through about February of this year. And, meant that there was higher turnover and expenses on the fund plus a lot of capital gains created during the process.
For example, AOL at $162 billion, which is what it was in December of last year, is a little bit too big for a mid-cap fund. Selling AOL at $86 a share when it had a cost basis of $5 created capital gains. But, if we wanted the fund to fit very nicely into the niche of mid-cap growth, there were certain things that needed to be done.
Q: Will you automatically sell a company once it goes from mid- to large-cap?
Dudley: We are limited in the amount of large cap names that we can hold to about 25 percent of the portfolio. The rest of it, 75 percent, really has to be invested in companies below $9.5 billion in market cap. There have been instances where stocks that we owned have graduated into that large-cap space and because we feel so confident in their long-term story---and their growth potential--that we'll hang on to them.
Q: The fund had over 110 stocks in it, now it has over 70. What's your ideal size?
Dudley: My target for the end of the first year was somewhere between 75 and 80 names, and we're close.
I like to be able to go down through the portfolio every day and when I look at it in the morning say, " I know why I own that name and here's the reason.... I know why I own that name and here's the reason why... and so on."My brain just gets dysfunctional after 75 or 80 names which is where that ideal number (75-80 holdings) came from. I know other portfolio managers can do 150 names, some people can only do 10, and that's fine. But, we've been culling names out of the portfolio over time and really taking it down to the companies that we have the highest confidence in.
Q: And a couple of those would be....
Dudley: One is Phone.com, a software company that enables delivery of Internet services, like e-mail, travel and weather news, to wireless phones. They've combined with another company called Software.com. Phone.com is more of a platform and Software.com has the applications to sit on top of that platform which is why the two of them combining makes great sense. Both just reported earnings that were much better than expected.
Another is Andrx. They are a pharmaceutical company that makes generic drugs. The way that they compete is by reformulating a drug using their own patented technology to make it.
But what binds all the stocks in the fund together is their earnings growth and revenue growth potential. We want to see 20 percent on the bottom line and double digit growth on the top line.
Q: Anything that can be misunderstood about this portfolio?
Dudley: If you focus on its historical record you might miss the fact that the fund is totally different today than it was a year ago. You can see those changes not only in the fund holdings, but in sector weightings, the fund's name and even its performance.
|FUND:||State Street Research Mid-Cap Growth Fund|
|TOP HOLDINGS:||Phone.com; Andrx Corp.; Millipore; Cypress Semiconductor; and Powerwave.|
|PERFORMANCE:||Year-to-date through Sept. 30, the State Street Research Mid-Cap Growth Fund was up 15.66 percent. Over the past 12 months, ending Sept. 30, it was ahead nearly 55 percent.|
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