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Mutual-fund managers hate being called value investors. Maybe it's because the term sounds so constrictive -- as if a mature individual doesn't have the freedom to go outside the bounds of some ancient stock-picking method. Or maybe it's that the word "value" has become so unpopular as "momentum" and "growth" have become the buzzwords to invest by.
One pro who not only accepts the value moniker but embraces it is Allen Ashcroft, manager of the Ark Blue Chip Equity fund (ARCBX). Despite his lack of trendiness, Ashcroft has managed to steer his fund past the S&P 500 performance benchmark in both the three-year category of total return and year-to-date. For the past three years, the fund averaged an annual return of 24.9%, more than two percentage points better than the S&P 500. Since the beginning of the year through the close of market on May 4, the fund has returned 2.8%, while the S&P 500 has lost a little more than 4%. In these days of market volatility, it's unusual to find a manager who can consistently beat the market.
The key to the fund's performance, says Ashcroft, has been coming up with a good balance between value and growth stocks -- and when possible, finding both qualities in same stock. "I've been schooled in the value method," he says. "But I also have a bent for high-growth stocks. If I can find both of those characteristics in a good company, I've found a winning stock."
SHOCKER.
Ashcroft starts his search for stocks based on four criteria. He wants companies that are well managed, have a franchise product, dominate their marketplace, and deliver consistently on their promises. That sounds like a Warren Buffett recipe for buying Coke (KO), right? Well, Ashcroft's fund owns no Coke. He has instead interpreted the above criteria in his own way and come up with some surprising stocks.
Probably the biggest shocker is the fund's top holding. Tyco International (TYC), which used to be about as popular as the black plague on Wall Street thanks to accounting problems that caused the stock to lose more than half its value in December. Ashcroft already owned a small piece of Tyco then, but he piled into it when it hit rock bottom at $22. He started selling other shares to buy more Tyco after it started its rebound at $27. Today, the company has cleared up its accounting problems, and the stock closed at $49.38 on May 5.
Why did Ashcroft believe in the company? "I knew that it had great management," he says. "I knew that they were aggressive [in their accounting], but I also knew that they weren't unethical." Ashcroft was familiar with the company because of another company he followed closely: AMP Corp. AMP was on the verge of being bought by Allied Signal when Tyco swept in as a white knight in early 1999. Since then, Tyco has cleaned up AMP and is on the verge of spinning off one of its units, M/A-Com, for an amount that should be nearly equal to the $12 billion that Tyco paid for all of AMP. "The value that they extract from the companies they buy is phenomenal," says Ashcroft, who expects the stock to continue its upward climb in the year ahead.
A SECURE PLAY.
Another Ashcroft favorite is Honeywell (HON). This conglomerate has been best known as a poor man's GE (GE). But Ashcroft likes the way it has restructured itself after its merger with the aforementioned Allied Signal. Today, 40% of Honeywell's revenue comes from its avionics division. Ashcroft expects that business to boom as airports start spending some of the $40 billion that President Clinton has allotted to them for renovating their radar systems. Much of that money will go to buy Honeywell systems since it dominates that market.
In addition, Ashcroft likes Honeywell's home-monitoring division, which sells security-, fire-, and temperature-monitoring systems for new homes. In the first quarter of this year, that division increased revenue by 22% over the same quarter last year. At the close of market on May 5, Honeywell stood at $54.31.
Plenty of stocks fit Ashcroft's criteria that he nonetheless avoids. For instance, he has never owned Amazon.com (AMZN), even though it dominates its market, has brilliant management, and has never steered Wall Street wrong with its earnings guidance. "It's a great story, but I have serious doubts about its business model. I can't buy a stock where I'm uncertain if it might ever make a profit," he says.
HEFTY LOAD.
Then again, some stocks he wished he never owned. Although Procter & Gamble (PG) seemed like a good core holding that would provide steadiness to his portfolio, it has become one of his worst performers, thanks to the company's sudden inability to increase its earnings. He still owns the stock though, mainly because of heavy insider buying that he has observed recently.
The fund, which has a 4.75% load in addition to an expense ratio of 1%, is available through most brokerages. It also has a B class, which allows investors to pay the load gradually over a period of years. While that's a lot to pay when so many funds these days don't charge sales loads, sometimes it's worth paying a little extra to get a smooth return.
Jaffe writes about the markets for Business Week Online Want to know more about Ark Blue Chip Equity fund? Ask away at our Ask Sam Jaffe Interactive Forum
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