Mid Cap Fund Blends Value

08/06/2004 12:00 am EST

Focus:

Walter Frank

CIO, MONEYLETTER

A common theme we've seen in this special report is that the leading advisors are drawn towards lesser-known, under-appreciated funds. Such is the case with this selection by Walter Frank, editor of MONEYLETTER. Here he looks at ABN AMRO Mid Cap.

"ABN AMRO Mid Cap Fund (CHTTX) may not be a household name to most people and thus suffers from a lack of recognition. It’s a wonder that the fund has stayed as small as it has, with net assets of only $33 million. Look at the record. The current manager, Thyra Zerhusen, took the helm a bit over five years ago. She has chalked up a 15% average annual return for the trailing five years through June 18. ABN AMRO is a prominent international bank based in the Netherlands. Its origins date back to 1825. Several mergers and 167 years later, the current ABN AMRO was formed. It ranks as the 11th largest bank in Europe and 23rd in the world.

"Zerhusen has immersed herself in the mid-cap marketplace for about 25 years. She says that the mid-cap area offers the best opportunities, with stocks falling between the cracks while investors focus on the large and small cap arenas. She finds that mid-caps often are not well covered by Wall Street, and thus less efficiently priced. She is able to find stocks that sport faster growth than large cap stocks, are more liquid than small caps, and sell at lower valuations. And importantly to this manager, access to management is better in the mid-cap arena than in large caps, and she welcomes the opportunity to determine which ones are trustworthy.

"This fund is classified as a blend fund, but value plays a very strong role. Indeed, Zerhusen takes a deeply fundamental, bottom-up approach. She looks for firms with growing market share, which often leads to improving sales and earnings growth. She favors those with niche businesses, especially those that make their clients more productive, that have products you cannot do without, or have one of the best technologies in their business. The balance sheet is important and key factors must be strong or at least improving, which provides a firm with options for attaining growth. Zerhusen requires low debt; no more than a 50% debt to capitalization ratio. Finally, she considers a number of valuation criteria and aims to buy on the cheap, and often finds opportunities when a stock sells off for a short-term reason, such as missing a quarterly earnings projection.

"When Zerhusen finds a stock she likes, she often will not hesitate to take a relatively large position. The top two holdings – Reader’s Digest and Unisys – each account for more than 5% of assets, just below the maximum 6% she will hold in any one stock. The fund is concentrated as well. There are only 39 stocks in the portfolio currently. That concentration can make for an uneven ride at times. Zerhusen is the first to admit that sometimes she buys early, and a purchase may initially decline after being added to the portfolio. Top holding Reader’s Digest is a prime example of a stock she bought early. The stock plunged when it had a couple of disappointing quarters, and Zerhusen was attracted by its valuation and the asset value of its proprietary mailing lists. Overall, the fund advanced 41.4% in 2003, and is ahead by 11.4% thus far this year. This year’s performance places it at the pinnacle of Morningstar’s mid-cap blend category."

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