). Because she generally looks to where a stock will be in one year, she doesn't mind if a company has a bad quarter -- unlike many on Wall Street.
The mid-cap segment often provides overlooked bargains, according to Zerhusen, because investors more often focus on large- and small-cap stocks. She predicts gains for consumer-discretionary stocks, including Reader's Digest (RDA
), Scholastic Corp. (SCHL
), and Borg Warner (BWA
Zerhusen's strategy has met with success. For the five-year period through June, the fund rose an average annualized 9.2%, vs. 5.4% for its mid-cap blend peers. This year through the end of July, it's up 24.5%, vs. 18.2% for its peers. Based on risk and return characteristics over the last three years, Standard & Poor's awards the fund its highest overall rank of 5 Stars.
Bill Gerdes of S&P's Fund Advisor recently spoke with Zerhusen about the fund's strategy. Edited excerpts from their conversation follow:
Q: Have you found fewer attractively priced stocks because of this year's market rally?
A: There's always something to buy. Companies have a bad quarter, so the stock falls. At the end of the first quarter, I found several attractive names, including Andrew Corp. (ANDW
), Veritas (VTS
), and Reuters Group (RTRSY
Q: What's your approach to valuations?
A: I look at various criteria: price-earnings multiples, growth rates, and in some industries, market cap to revenue ratios. Right now, Reader's Digest and Scholastic are selling at fractions of their revenues. Basically, my decisions are bottom up.
Q: Why should investors consider mid-cap stocks?
A: They fall between the cracks. Most stockholders focus on large-cap and small-cap stocks, so the mid-cap segment is somewhat overlooked and less efficient than other areas. You can find mid-cap companies that are growing faster than large-cap companies and have better liquidity than small caps. Also, it's easier to get access to managements of mid-cap companies than of large-cap companies. I talk to the CEOs of some of my mid-cap holdings.
Also, I often find companies that aren't well covered by Wall Street analysts. I owned a stock that wasn't covered by any Wall Street analysts -- Wallace Computer -- that was taken over this year.
Q: What is your turnover?
A: I like to have a turnover rate of about 45% and aim for no more than 35 holdings. I do a lot of my own research, so I focus on a small number of companies. I don't want to have more than a 6% position in any one stock. Once it gets to 5%, I trim it.
Q: The fund tends to be more volatile than its peers?
A: Several holdings have been taken over, so I had to reinvest the money. Some of my new positions initially went down.
Q: Why does the fund have good long-term returns?
A: I can live with a stock that has one bad quarter. I always ask where a stock could be be one year from now.
Q: Would you mention a long-term holding that you particularly like?
A: I've owned American Power Conversion (APCC
) for a long time, but sometimes the stock runs up, so I periodically trim my holdings.
Q: What are the largest sectors in the fund?
A: Consumer discretionary is over 25% of the fund. My holdings in that sector include Readers Digest, Reuters, and Borg Warner. Information technology is over 20% of the fund. Stocks in that sector have risen, so I've been trimming some positions. I own Unisys Corp. (UIS
), which is my biggest holding, Progress Software (PRGS
), and Andrew.