Chase Mid-Cap Growth Fund (CHAMX) portfolio manager Brian Lazorishak explains the strategies that have led to superior returns. He tells MoneyShow.com about two of the fund’s holdings, and why he sees continued strength in those names.
Kate Stalter: I’m on the phone today with Brian Lazorishak, portfolio manager of the Chase Mid-Cap Growth Fund, which has a five-star rating from Morningstar. And I want to point out: The fund is managed by Chase Investment Council, an independent advisory. So you’re not affiliated with JPMorgan Chase.
I wanted to start out today by letting you set the stage about the mid-cap space, one that I personally like a lot because it’s fertile ground for investor returns. But it seems to get overlooked as a category.
Brian Lazorishak: Yeah, that’s correct, Kate. The mid-cap space in general is one we feel is overlooked. We think there are some good returns to be offered there, especially on a return-adjusted basis.
If you look at the last 10, 20, or 30 years ended December 2011, mid-cap stocks as measured by the Russell Midcap Index have actually outperformed both large- and small-cap stocks. They’ve done it with a risk profile between large and small.
So what you end up with are pretty favorable risk-adjusted returns from that category. We feel it’s a good way to get some diversification away from large-cap without taking on some of the risks that you get in the smaller-cap area.
Kate Stalter: Talk to us a little bit about the fund’s objective and your investing methodology.
Brian Lazorishak: The fund is a growth fund, so we’re focusing on companies with historical growth records and projected growth into the future. We additionally are looking at consistency of growth as a major determinant of whether a stock is eligible for a position in the fund.
And then of course, we’re looking strictly at the mid-cap space. Most of our holdings fall between $1 billion and $10 billion in market cap, though we do have a few that we may have bought in the $8 billion or $9 billion range that have gone higher over time. So we keep it as a diversified fund, but with most of the assets in that mid-cap space.
Kate Stalter: Let me just follow up on a couple things there. When you’re talking about consistency of growth, you’re referring to earnings growth?
Brian Lazorishak: Yes, I’m referring to historical earnings growth. Most of the stocks in the portfolio will have been up in earnings year over year seven of the last ten years. We prefer to see a demonstrated record of consistent earnings growth, rather than a company that is up one year and down the next.
Kate Stalter: When you’re talking about the market cap, I understand what you’re saying: Sometimes after you bought the stock, it will rise and be higher than that $10 billion cap. But will you ever look at something and say, “This has gone too far out of our range, and we just have to sell it because of the price level?"
Brian Lazorishak: Sure, we certainly don’t continue to hold stocks beyond a certain size. There’s no magic cutoff when it crosses the, let’s say $12 billion range, where we immediately push a stock out. But once it starts getting up into the lower teens, it really, in our mind, becomes a candidate for sale at an opportune time. We’ll start trimming or eliminate that position entirely.
Kate Stalter: Now Brian, as you know, a lot of individuals who invest and trade in the mid-cap space use technical analysis in addition to fundamentals. But as a professional fund manager, is that something you rely on? Or are you strictly using the fundamentals?
Brian Lazorishak: No, technical analysis is a very important part of our process. We are firm believers—and have been for the entire history of our firm, not just the mid-cap fund—in marrying the fundamental and technical approaches.
We look at the fundamental approach as a way to identify good companies with solid growth characteristics and economic or fundamental outlooks, and the technical side as a tool to help us identify stocks that have a higher probability of success. We feel that marrying those two approaches together gives us a greater degree of success, and a better chance at picking big winners.
Kate Stalter: Let’s shift, then, into some of the holdings. Are there a couple of holdings you can tell us about today, and why you like them?
|pagebreak|Brian Lazorishak: Sure. We typically range between 35 and 50 holdings in the fund at any given time. We think that’s a good number, by the way, to be able to have a portfolio where the returns are driven by stock selection, yet still have a diversified mix of companies—which is important in the mid-cap space, because they do tend to be somewhat more volatile than large caps.
Just thinking of a few that might be, I guess, more representative of our kind of approach: One holding that really falls into that category, where it’s becoming a bit large, we’ve held it so long, would be Dollar Tree (DLTR) stores.
I think most people know of Dollar Tree. They operate a little bit over 4,000 stores in the US and Canada, where they sell everything for $1. It’s been a great strategy the last couple years. They’ve really taken share away from other people as some consumers have traded down.
They’re also doing a good job taking share away from Wal-Mart (WMT). People are going to Dollar Tree because they don’t want to deal with the hassle of getting through a checkout line in Wal-Mart.
The company has continued to grow their store base, they’ve continued to execute well in a same-store basis, and earnings growth has continued to come in at the 20% level. It’s been a very successful holding. It’s a good example of the type of company we look for that has solid growth, yet I think I’d argue, some defensive characteristics and some insulation from economic problems.
Kate Stalter: Any from any other sectors that are holdings that you like right now?
Brian Lazorishak: One of our holdings that we bought...I want to say last August, it may have been a little bit before that, was a company called Questcor (QCOR). Questcor Pharmaceuticals is a small pharmaceutical company that really has one product. It’s a drug called Acthar.
This is an example of a mid-cap company compared to a large-cap. Some of the large-cap pharmaceuticals are facing patent cliffs, are facing issues with growth. Questcor has one drug, but is finding new indications for that drug. It’s been able to grow dramatically and the outlook for growth continues to be strong. As health-care companies go, this one has continued to grow very well, and the stock has been rewarded.
Kate Stalter: Last question for you today, Brian: Where do you see advisors using this particular fund as part of the asset mix with other instruments that they’re putting clients into? Is it something that they consider for more aggressive investors, or is there actually a wider customer base than that?
Brian Lazorishak: I think it’s a wider customer base if it’s used in the right way. We are often used by clients—and in particular, in our mid-cap fund—as maybe one of the growth managers. As growth managers go, I think it’s important to realize that we’re in some ways a little bit less aggressive than some others.
Especially in the mid-cap space, you often see portfolios that are full of the highest growth and highest P/E stocks, and sometimes take on a little more risk than we do. Those portfolios tend to do very well in up markets, but tend to suffer pretty badly in the down markets. We’re trying to keep one eye on the risk side of the equation.
We’ve seen people use our fund as the only mid-cap growth assignment, and we’ve seen people match us up with a more aggressive manager. The idea being we tend to do well when those more aggressive managers underperform, and vice versa.
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