Established in 1928 to invest exclusively in insurance and banking, Century Shares Trust (CENSX) is
one of the nation's oldest mutual funds. Its mandate was relaxed in 2001, permitting holdings in all sectors, although at least 25% of the fund's assets must be in financial and business-related service companies. In 2004, the fund added Microsoft (MSFT), United Technologies (UTX), and Johnson & Johnson (JNJ).
Century Shares had $362.4 million in assets at the end of November. It has been managed by Lanny Thorndike since 1999, and Kevin Callahan joined as co-manager in 2001. The conservative, large-cap value fund emphasizes fundamental, in-house research, and its holdings range from 40 to 55 mid- to large-cap stocks.
The fund has low
volatility with a
standard deviation of 11.8, compared with its peers' average of 15.4. The portfolio outperformed its peers over the three- and five-year periods through November, ringing up annualized returns of 5.9% and 9.8%, respectively, vs. its peers' 4.9% and 3.4% gains. However, the fund underperformed for the year-to-date (8.3% vs. peers' 9.1%) and one-year (11.4% vs. 15.4%) periods through November.
Carol Wood of Standard & Poor's Fund Advisor spoke recently with Callahan and Thorndike about the fund's investing strategy and top holdings. Edited excerpts of their conversation follow:
Q: How would you describe your investment philosophy?
Callahan: We view our fund as a core holding, combining core and growth approaches. We like mid- to large-cap companies that grow faster than average and generate consistent results. Our universe is about 1,200 to 1,300 companies whose market cap is $2 billion and above.
We like to buy stocks when they're attractively valued and then own them for two to five years. If we know a company well and its stock collapses because of a short-term issue, we're willing to buy and wait two years or longer.
We focus on service-based companies, which tend to be less capital-intensive and able to generate higher
returns on equity. They also tend to be consistent, stable, and less cyclical.
Q: What is your investment strategy?
Callahan: We are bottom-up stock pickers. Our five analysts -- Lanny and myself, plus three other analysts and a trader, all exclusive to our two funds -- follow 40 to 100 names each. Each analyst makes about 80 site visits per year.
Q: How are the fund's assets typically allocated?
Thorndike: Financials are generally about a 45% weighting, but our current position is probably less than that. Consumer discretionary is about 12%, consumer staples about 1%, health care about 23%, producer durables about 3% to 4%, and technology about 8%. About 4% is cash.
We think our sector approach -- which focuses on health-care, consumer, financial, and technology stocks -- gives the portfolio a lower risk profile than a lot of our competition. We look to beat our benchmark, the S&P 500-stock index, but with lower-than-average risk.
Q: Does a large weighting in financial services increase your risk?
Callahan: We're overweight in financials because we emphasize earnings. Although the sector represents only about 20% of the S&P 500's total market cap, it generates approximately 35% of the index's earnings.
The top five financial names include Berkshire Hathaway (BRK), AFLAC (AFL), and American International Group (AIG). AIG generates return on equity and earnings growth of approximately 15%. Despite regulatory issues, it has a strong international franchise and is well positioned for the long term.
MBIA (MBI), a financial-guaranty company, generally knows what 80% to 90% of its revenue and earnings will be at the beginning of the year. They put that business on the books, and potentially earn revenue from that business over a 10-year to 20-year time frame.
Q: S&P equity analysts rate MBIA stock as a sell.
Callahan: I believe MBIA is currently undervalued given its fundamentals, so the stock is likely to rise going forward.
Q: What are your buy criteria for stocks?
Callahan: First and foremost, returns on equity of 15%, and 15% or better growth in book value over a three- to five-year rolling period. We like to see top-line growth of at least 10%, and bottom-line growth of 15% or higher.
Valuations are also important -- the cheaper, the better for us. For the overall portfolio, the price-to-earnings-to-growth ratio is less than 100.
Q: What are your sell criteria?
Callahan: Once a stock gets within 5% of our price target, we trim it. We also trim or sell if a company's fundamentals change, or if there is some event, such as the CFO resigning for personal reasons, which is generally a red flag.
Q: You decided to hold onto Marsh & McLennan (MMC).
Callahan: Marsh & McLennan got to a low of $24, but we felt the market was overreacting. Based on our inputs, Marsh should be trading north of $30 a share.
Q: Could you single out a holding that reflects your investment style?
Thorndike: Microsoft -- its return on equity is above 20%, and it will have about 20% earnings growth in 2005. It's trading at 21 times its 2005 price-earnings ratio. We think it's very well managed.
Q: Do you have an outlook for the market?
Callahan: I expect the economy to gradually improve, so market gains are likely to be modestly positive, ranging from 7% to 12%. From Standard & Poor's Fund Advisor