The GE U.S. Equity Fund (GEEQX) seeks to outperform the S&P 500 Index by employing a "multi-style" investment strategy that combines growth and value in order to create a portfolio that is "style-neutral." In essence, the fund has three components: one formed by a team of growth-oriented managers, one formed by a group of value-oriented managers; and the third, which is a selection of the best ideas of a research analyst team.
Eugene Bolton, head of GE's domestic equity group, oversees the entire process, having led the fund since its inception in February 1993.
Year-to-date through October 31, the fund declined 15.4%, while the S&P 500 was down 18.9%. In a very difficult calendar 2000, the fund was essentially flat (edging down 0.4%), while the benchmark shed 9.1%.
Recognizing Bolton's long-term solid performance and consistency of style, the fund has been designated a Select Fund by Standard & Poor's.
Palash Ghosh of Standard & Poor's Fund Advisor recently spoke with Bolton about about the fund's investing strategy, top holdings and recent portfolio moves. Edited excerpts of their conversation follow:
Q: How large is the fund in terms of net assets and number of stocks?
A: As of September 30, we had about $614 million in net assets comprising 154 stocks -- we typically keep between 150 and 160 names in the portfolio. Despite the large number of stocks, the portfolio is quite concentrated. For example, the eighteen largest positions represent about 36% of the fund's total assets.
Q: Describe your investment process and your selection criteria.
A: There are three components to the fund, each of which is run by a different portfolio management team. I oversee the entire process. The first is the value component, the second is a growth component, and the third component is a group of the best ideas from our research analyst team. This third portion is designed to be "sector-neutral." The assets are allocated in such a way that the fund is always "style-neutral" relative to our benchmark, the S&P 500 Index. Sometimes, there is cross-ownership of stocks among the three segments.
While we are style-neutral overall, we are not sector-neutral -- however, generally our sector allocations will not vary by more than 4% relative to the S&P 500.
With regard to the investment selection process, all our managers and research analysts use a strictly bottom-up, fundamental method. The common buy criteria (regardless of management style) would comprise attractive valuations, financial strength, and high-quality, shareholder-friendly management.
The growth managers look for large-cap market leaders which can deliver sustainable, double-digit annual growth. Moreover, they will not overpay for a stock. They will sell a stock when fundamentals deteriorate or when a stock price gets way ahead of itself. The growth people generally have an annual turnover rate of about 15%.
The value managers look at such classic value indicators as low price-to-earnings (p-e), low price-to-book value, higher dividend yield and a "catalyst" that will unlock value. The value managers have an annual turnover rate of about 30%-40% -- when a stock reaches a price target, they'll trim it back; when it slips in price, they'll add to the position. Of course, they'll sell out entirely when fundamentals deteriorate.
Q: Do the value and growth managers have an equal allocation in the fund?
A: No, in order to maintain the style-neutral quality of the fund, we currently favor the value portion over growth, given the nature of the overall market. That allocation obviously varies with time.
Q: What was the impetus behind the formation of this fund?
A: This fund was created as a core product which replicates the domestic equity investments in GE's pension fund, which is available of GE employees. This fund was also designed as a vehicle to remove some of the volatility inherent in style bias and style fluctuation and just focus purely on individual stock selection, regardless of style considerations.
Q: What are your largest holdings currently?
A: As of October 29: Citigroup (C), 4.9%; Exxon-Mobil (XOM), 3.4%; Microsoft (MSFT), 3.2%; Johnson & Johnson (JNJ), 3.0%; and Merck (MRK), 3.0%.
Q: What are your largest sectors?
A: As of September 30: Consumer staples, 23.4%; financials, 21.2%; technology, 13.7%; consumer cyclicals, 10.4%, and utilities, 9.1%. Our biggest overweight relative to the S&P 500 are in financials, energy and consumer staples. However, keep in mind that we select stocks individually based purely on bottom-up research. The sector allocations are a secondary result of that process; the various sector overweights and underweights tend to 'even out' over the long term.
Q: You've outperformed your benchmark this year and calendar 2000. What do you attribute that to?
A: Calendar 2000 was an unusual year in that we kept a larger-than-normal underweight in the technology sector -- this actually began in late 1999, and was a result of our bottom-up valuation process -- we determined that so many tech issues were vastly overpriced. When techs started to crash we bought back in opportunistically, but as a whole, it still represents an underweight position in the fund. Even when tech was flying high in 1998 and 1999, we were consistently underweight in the sector.
Q: Has your fund suffered net redemptions this year?
A: We have seen very few redemptions and we are committed to staying fully invested; our cash position has been at about 2.0% or less.
Q: How have you dealt with all the volatility and uncertainty in the markets this year?
A: We've taken a somewhat defensive position, as exemplified by our overweight position in energy and healthcare; and, of course, we remain underweight in technology. We are also underweight in consumer cyclicals, reflecting our view that consumer spending will decline. However, all these allocations are the fallout of our bottom-up buying process.
Q: What is your outlook for next year's market?
A: Although we generally don't examine macro-economic factors, I will say that the year-long series of interest rate cuts and the government's fiscal stimulus program should positively stimulate the economy and ultimately corporate earnings and the stock market. Our best guess is that the U.S. economy will not recover until the second half of 2002. The biggest variable should be how much the consumer will be willing to spend. For example, we haven't yet seen the full impact of layoffs and rising unemployment. From Standard & Poor's FundAdvisor