) since 1972. In fact, the fund is so old that Stratton says it may be mislabeled by today's standards. "When we put 'growth' in the title, the mutual fund market wasn't divided into growth and value investing," he says. "We just wanted the money in the fund to grow."
Indeed, the BusinessWeek Mutual Fund Scoreboard categorizes Stratton Growth, based in Plymouth Meeting, Pa., as an all-cap fund because Stratton buys stocks in companies of all sizes. He finds them by ranking shares on six valuation criteria, including price-earnings and price-to-cash-flow ratios, as well as some growth-oriented momentum stats, such as one that measures the rate of change of analysts' earnings estimates. About 70% of the ranking is determined by value criteria and 30% by growth criteria. "I don't want to buy a cheap stock that just sits there," Stratton says. "The company needs some sort of catalyst for improvement."
Stratton says the fund's flexibility is an advantage, allowing him to own a worldclass blue chip such as Caterpillar (CAT
), which has a $50 billion market cap, alongside oil-exploration company Penn Virginia (PVA
), with one of $1.2 billion. Currently he prefers energy stocks, particularly smaller producers, which tend to have lower valuations and are in a better position to benefit from higher oil prices than majors such as ExxonMobil (XOM
He also favors railroad stocks Burlington Northern Santa Fe (BNI
) and Norfolk Southern (NSC
), which have market caps of upwards of $20 billion. "There are no small railroad companies," he notes. "If this was a small-cap fund, I'd be shut out." He's bullish on the rails because they're more fuel-efficient than truckers and cheaper for shippers to use.
Since launching on Sept. 30, 1972, the fund has garnered a 4,118% cumulative return, or 12.14% annualized, vs. 3,244% or 11.12% for the Standard & Poor's 500-stock index. That one percentage point difference doesn't sound like a lot, but over 33 years it adds up.
Stratton attributes part of his success to a cautious optimism, something he doesn't see much of today. "The level of cynicism is much greater today" than in the '70s, he says. "Now when a company comes out with earnings, all people want to do is find out what's wrong with it. If you get good news, the stock still goes down. I don't think it's a healthy attitude. It makes everybody too short-term oriented." With nearly half a century of investing under his belt, this is one manager no one could accuse of thinking short term. By Lewis Braham