). Freeman seeks out promising small companies and sticks with them, often for several years, thereby keeping the fund's annual turnover around 10%.
A growth investor, Freeman also stresses valuations. He believes "a growth investor who doesn't pay attention to valuations is a fool who will be unemployed."
Freeman's fund has held up well in recent years, comfortably beating the S&P 500 in each of the last three years. Last year, the fund rose 19.5%, versus a drop of 9.2% for the index. The fund carries an S&P three-Year overall ranking of 5 Stars.
Bill Gerdes of Standard & Poor's FundAdvisor recently sat down with Freeman to discuss his investing strategy -- and the stocks and sectors he likes now.
Q: How would you describe the fund?
A: We buy small- and mid-cap companies that we expect will become much larger. About one-third of our current holdings are large-cap stocks, but we bought most of them when they were small-caps, usually under $1 billion.
We're bottom-up investors, who look for companies with unique products and motivated management teams. We consider where managements have previously been and their financial backing.
Q: What are the fund's largest sectors?
A: Our biggest sector is health care. One key holding, IDEXX Laboratories (IDXX
), has a unique approach to diseases. Other attractive health care companies include IDEC Pharmaceuticals (IDPH
), Genzyme Corp-Genl Div (GENZ
), and Chiron Corp (CHIR
Financial services is another large weighting, because it's a consolidating industry, and the economy needs to finance growth. I like the asset management business, where we hold Neuberger Berman (NEU
). Neuberger's CEO, Jeffrey Lane, was my old boss.
Q: Do you consider valuations when investing?
A: A growth investor who doesn't pay attention to valuations is a fool who will be unemployed. For example, we bought Lehman Brothers (LEH
), a growth company, when it was beaten down.
Q: What is the fund's turnover?
A: I don't want to sell something if it's doing well. What defines us is our exceptionally low turnover, averaging about 10% a year.
Q: Why did the fund do well last year?
A: We didn't change the portfolio. At our lowest point last year, we were down 0.5%. We like companies that will grow regardless of the economy, such as our biotech holdings.
Q: What are your largest holdings?
A: Tyco International (TYC
), Lehman Brothers, Forest Labs (FRX
), Comcast (CCZ
), and IDEXX Laboratories. Tyco's market cap has gone from $240 million, when we bought it, to $96 billion now.
Q: What areas of the market are your currently looking at?
A: We've been moving into technology, because valuations have become more reasonable. As the Federal Reserve re-stimulates the economy, technology companies will grow, though earnings estimates will fall this year. We are going through a bottoming out process, where fear has replaced greed. From Standard & Poor's FundAdvisor