Thought Piece
Yes, Oshkosh, that brunt of many jokes and the name of kids clothing!
On a historical note, Lewis Hine was also an Oshkosh boy, whose father ran a restaurant in Oshkosh as did mine and who matriculated at Columbia and lived in Manhattan as did I. Arguably, Lewis Hine’s photographs of child labor and Manhattan slums from the 1930’s created the momentum to write the first Child Labors Laws in the US. Also, Hine’s soaring photos of the construction of the Empire State Building are some of the first things I remember when I first moved to Manhattan in 1974. This then is a tribute to both Oshkosh Boys. On a personal note, Robert Kleinschmidt (seen above) dated my sister Nancy in 7th grade during 1960 in Oshkosh, which certainly helped develop our friendship over the last 50 years. After Columbia Graduate School, he has gone on to become one of the highest rated Money Managers on Wall Street over the last 40 years.
Fund Managers Win With Tech Stalwarts and Burly Brand Names
The Fidelity OTC Portfolio, for example, can invest anywhere its manager, Gavin S. Baker, sees promise, but by charter, it tilts toward well-recognized growth companies trading on the Nasdaq. Apple was its biggest stake at the end of November, accounting for nearly 9 percent of the portfolio. Google’s holding company, Alphabet, came in second, at nearly 8 percent.
Mr. Baker, who has managed the fund since 2009, said he believed that the best companies combined top technology with burly brand names and large scale. Take Alphabet, he said. “Not only does it have a great brand, but every day it does seven to eight times as many searches as all of its competitors combined. So every day its search accuracy is improving that much faster than competitors’.”
As befits a growth investor, Mr. Baker is a technophile. He will riff at length about the technological themes that undergird his picks, like the omnipresence of cloud computing, the maturation of solar power and the promise of artificial intelligence. Skeptics complain the information age isn’t yielding benefits comparable to the industrial revolution, but that is humbug, he says.
The steam engine, to take advantage of that, you needed to dig canals and put in railroads. The peak change was 75 to 100 years after the invention.” As far as the microchip goes, he said, “All of the infrastructure is in place, and we’re entering the period of peak economic and social change.
Ahead of the Market
How three of the better performers of the fourth quarter of 2015 fared against the market — and against their peer groups of funds.
Even video game makers are benefiting, he said. Consider Activision Blizzard, another top holding and the producer of Call of Duty and Guitar Hero. A decade ago, its market comprised a few million game consoles and personal computers, Mr. Baker said. “Now you have a billion smartphones, all of which you can play a video game on.” And Activision Blizzard is trying to broaden its share of the mobile market with its pending acquisition of King Digital Entertainment, maker of the game Candy Crush.
Mr. Baker’s fund, with an expense ratio of 0.83 percent, returned 13.34 percent for the quarter, compared with 7.04 percent for the Standard & Poor’s 500-stock index.
As its name suggests, the Value Line Larger Companies focused fund, managed by Cindy J. Starke, also banks on big outfits. Like Mr. Baker’s fund, it lately held Apple, Alphabet and Activision Blizzard. Ms. Starke said she, too, believed in the power of brands, even when they weren’t pre-eminently technology companies.
“Brands hold their value, and a global brand isn’t dependent on one geography,” she said. Estée Lauder, Starbucks and Nike were all among her fund’s recent stakes. “Their markets are growing because they address the whole world,” she said.
Sturdy brands also drew her to Constellation Brands, which owns the United States rights to popular Mexican beers like Corona, Modelo and Pacifico, as well as a groaning cellar of wines. “In good times and bad, people still drink wine and beer,” she said.
Ms. Starke took over her fund about a year and a half ago. It then held more than 80 stocks. She set about paring that number, with an aim of keeping the portfolio at 30 to 50 holdings. “In large-cap growth, it’s hard to outperform with a big portfolio,” she said. “A concentrated portfolio is the way to do it.” With too many holdings, a fund can end up looking too much like the broader market and merely matching its return.
She also plowed a greater portion of the fund’s money into her top picks. Previously, the top 10 holdings accounted for about 14 percent of the portfolio, she said. Now they are more than 40 percent.
The fund’s biggest sector weightings are information technology, health care and consumer discretionary. Those tend to produce the best earnings growth, she said. “I’m looking for healthy earnings growth and healthy sales growth,” she said.
Ms. Starke’s fund, with an expense ratio of 1.12, returned 9.92 percent in the fourth quarter.
Robert W. Kleinschmidt of the Tocqueville fund recently had some of the same recent top holdings as Mr. Baker and Ms. Starke. But he found them through a different — and longer — path. He calls himself a contrarian value investor and has been managing his offering since 1992.
Like Mr. Baker’s fund, it lately held shares of Microsoft. Mr. Kleinschmidt said the fund had owned the stock for about a decade, even as the company was seen as falling behind competitors like Apple and Google. But Microsoft kept putting up strong numbers, he said.
“Forget the name,” he said. “If I just gave you their market share, their cash flow, their return on equity, if I showed you all of that, would you be interested? Yes. Most people would be.”
Facebook, an overlap with both Mr. Baker’s and Ms. Starke’s top holdings, is a more recent purchase. Mr. Kleinschmidt said he was attracted to the social network’s enormous customer base, about 600 million people when the company went public in 2012. Tocqueville bought shares in the months after Facebook’s initial public offering, when the stock sagged. “I reasoned a smart management team would be able to figure out how to make money on 600 million users,” Mr. Kleinschmidt said. Facebook says its network has grown and estimates more than a billion people use its service daily.
Mr. Kleinschmidt has patience. As he has with Microsoft, he will stick with a stock for years. His fund’s annual turnover ratio is 15 percent. In contrast, the average actively managed stock fund tracked by Morningstar turns over about two-thirds of its portfolio annually.
“One of the hardest things to do in this business — and yet one of the best things — can be to sit on your hands and not let the market’s noise convince you that you have to do something,” he said.
Mr. Kleinschmidt cautioned that his turnover might increase in coming months. As a contrarian, he said he often finds buying opportunities when the market sags, as it has lately. “The essence of a contrarian thinker is to lean against the wind. You do that by looking into situations where the prevailing feeling is, ‘Oh, my God.’”
Mr. Kleinschmidt’s fund, with an expense ratio of 1.25 percent, returned 10.97 percent in the fourth quarter.
