Wiener: A MidCap Interview

09/10/2004 12:00 am EST


Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Dan Wiener is the quintessential expert on Vanguard funds. In addition to his own insights, one of the most exciting aspects of his newsletters is his interviews with Vanguard fund managers. Here are excerpts from his talk with mid-cap fund manager John Yoon.

"John Yoon, 37, is one of the two leaders of the eight-person squad that runs Vanguard MidCap Growth (VMGRX), a fund Vanguard adopted in 2002 when it had just a bit more than $30 million in assets," says Dan Wiener in his The Independent Adviser for Vanguard Investors. "Today the fund tops $400 million as Vanguard’s notoriously cautious shareholders have slowly warmed to the offering. Given the roller-coaster ride the fund has generated it may be awhile before assets really can grow. I checked in with Yoon to get his perspective on the potentially rewarding but risky world of high-stakes growth investing:"

John, let’s start with your overall outlook for the markets as a whole and growth stocks in particular.

"There is no overriding theme you can hang your hat on right now in terms of growth. It is very company specific and that’s what we are focused on - trying to find the best companies that are still showing growth. But it is definitely not a rising tide right now lifting all boats. It is not an environment where it’s very easy to find names. But that’s an environment that’s good for us because we have so many analysts looking. We are still finding companies that are growing."

There is some argument over valuations, though.

"At the beginning of the year valuations were not cheap. Now you are hearing companies taking up guidance and other companies taking down guidance and the market is rewarding companies that continue to show growth. It really depends on where the stock is on valuation. For example,  Polycom (PLCM NASDAQ) is a company in our portfolio. They are doing video conferencing and voice over IP and are benefiting from the proliferation of broadband. They posted pretty good numbers and the stock was up 4% on a day when the market was about flat. That’s a pretty good reaction. The stock had been beaten up a bit because people are so worried about the technology space in general."

Let’s talk performance for a minute. The portfolio took a heavy beating during the bear market and didn’t really rebound that strongly coming out of it. Why?

"In 2003 we didn’t perform as well as we would have expected to in such a strong rebounding market. Our style definitely lends itself to providing the most outperformance in growth markets, when the markets are going up. When we see strong growth trends we’ll jump on it. Times like today when things are very uncertain it’s difficult to find areas of growth. What we try to do is really focus on stock selection to give us our outperformance."

Do you have money in the fund?

"I have a lot of money in the fund. Outside of my house it is my biggest investment. And Evelyn Lapham (co-lead manager) has a lot of money in the fund. Neither Evelyn nor I have ever sold shares in the fund."

Okay, let’s talk stocks a bit because you’ve got a few new ones.

"We have purchased Southwest Airlines (LUV NYSE). You want to buy airline stocks when the sentiment in the group is at its worst. That’s where we are today. People are still worried about pricing, capacity, and fuel costs. We have seen better pricing in less competitive markets like those where Southwest Airlines competes. They are growing capacity and filling the seats and their revenues have been growing while they’ve been maintaining operating margins. Also, they have about 80% of their fuel costs hedged in 2004 and 2005 at the mid-$20 level. They have a good cost structure, they are growing capacity in a less competitive market, and they are doing very well. This is all about cost-competitiveness."

And what about other new names?

"Royal Caribbean (RCL NYSE) is a good growth stock at a good value. It’s good when the growth guys and the value guys like the same stock. It has been a great performer for us, based on demographic trend of baby boomers aging and choosing cruising for their leisure activities. As a company they have great visibility on their business. People book cruises fairly far in advance. We see very robust trends for the year. We keep on monitoring the booking activities. That’s the leading indicator. And then there are other trends as well that give you support for cruising. The amount of travel that is going on in the US has improved over the last couple of years, and particularly in 2004."

What else is a recent addition?

"We added Getty Images (GYI NYSE) recently. They provide stock photography to the advertising, sports, and entertainment industries. This is one of the few names that has really benefited from the use of the Internet. In stock photography the Internet really works. Getty has this huge library that allows anyone to go online and sort through the database. They build a library but they don’t pay the photographers unless the photograph is sold. They have the largest market share in stock photography. The big keep getting bigger and the small are getting shoved out of the way."

Getty sounds like a no-brainer. So, why now?

"The reason we came into it now was that the advertising market was on a decline the last several years and it finally turned at the end of last year and picked up steam this year. That’s when we felt comfortable getting into the stock. We try to invest in stories that have long-term appeal. This one really has long-term appeal. They just opened a Web site in Japan for Japanese local, country-specific photos. They are partnering with other companies in other parts of Asia as well. We bought it last May at about $54. I met with the company’s CFO in Chicago and got more comfortable with the company and strategy and that’s when we purchased it."

How about in the oil field?

"We are finding growth in the exploration and production, and service companies in the energy area. Both have had robust growth in the last year, year-and-a-half, given the recovery of the economy, the demand for oil and gas has increased, especially in China. Drilling is increasing and commodity prices are high and will probably stay high for a while. One stock we bought recently is GlobalSantaFe (GSF NYSE), the second largest offshore oil rig provider. You are finally seeing rig utilization going up and up so that you are seeing pricing improving as well. That’s when you start to see these stocks take off. They benefit from utilization going up. This is all fixed costs. Labor is the one variable there, so when pricing goes up they really benefit."

"MGI Pharma (MOGN NASDAQ) is another name we purchased this year. They provide a drug, Aloxi, that has become the fastest growing drug for the prevention of chemo-induced nausea and vomiting. The biggest problem with chemotherapy has been people getting so sick from the therapy. Aloxi is a one-time injection that shows greater efficacy in reducing or preventing the symptoms. The drug has been gaining share, growing very significantly, and had only been on the market for about six markets, and that’s when we started buying into the story."

Is there anything you’re doing differently in this environment?

"The challenges are at a much higher level. There is much more intensity because the environment is so mixed. So when stocks are not performing we question the holdings with much more intensity. We look at the underperforming names and go around the room and say, okay, is this 'in or out.' It has resulted in a couple of sales and has helped us clean out some names, leading to good outcomes that benefit the portfolio. We have high stakes in the success of the product overall. It’s very difficult to be complacent about anything in the portfolio."

Thanks for your time, John.

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