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 | Elliott & Page U.S. Mid-Cap
Analyst Report
Morningstar's Take
by Mark Chow
Morningstar
January 27, 2004
Growth bias, previously a handicap, now helps.
"Growth investing" is no longer a dirty phrase, and Elliott & Page U.S. Mid-Cap is no longer a laggard. After two consecutive years of poor performance, the volatile, high-turnover fund recovered nicely with a near-first-quartile 9.8% return in 2003.
As such, co-managers Mark Schmeer, Rhonda Chang and Noman Ali are running true to form. Their fund has tended to perform exceptionally well in rising markets when growth investing has been in favour, while suffering during bearish markets. In 2001 and 2002, when markets sagged, the fund's returns ranked near the bottom decile and bottom quartile respectively versus all U.S. equity mutual funds. But over the team's tenure since 1998, the combination of growth- and momentumstyle quantitative tools, fundamental analysis and short-term opportunistic trading has produced superior risk-adjusted returns.
The managers rank individual stocks using quantitative models that factor in earnings growth and revisions, earnings surprises and stock-price trends. Fundamentally, management seeks companies with industry leadership or niche products and strong balance sheets, and avoids highly leveraged firms. The fundamental analysis reveals the quality of companies, while the stock's ranking suggests the ideal timing of its purchase or sale.
Though it invests mainly in mid-caps, as its name indicates, the fund is not a pure mid-cap play. It generally holds 20% to 25% of its portfolio in large-cap stocks. The reason for this is that the managers like to hang on to successful mid-cap picks that they believe continue to have strong growth prospects once they become large caps.
Another small portion of the portfolio is dedicated to short-term trading. However, the managers say that this type of trading has become more difficult to execute profitably in recent years, and it has become a less significant element of the fund (currently 1%-3% from 5% of assets pre-2001). The portfolio's overall turnover rate has been high, reaching 249% in 2002 and an even loftier 421% in 2000. Much of this has been due to the short-term trading portion, where the typical holding period is a single month or less.
Strategy
Management uses both quantitative and fundamental analysis. The managers hold regular discussions, along with running a quantitative model, to decide the overall capitalization mix. They rank potential stock picks according to various sector-specific growth factors. The fund's sector weightings can deviate up to 5% from the S&P 400 Index, and the limit for any individual holding is 4% of the portfolio. Bottom-up stock selection is normally the focus, but small bets on industry sectors can be made. Stocks are held for as long as they meet management's growth and momentum criteria, and there are no preset price targets.
Management
Mark Schmeer is managing director of North American equities at MFC Global Investment Management in Toronto and manages the large-cap portion of this fund. He is also a member of the asset mix committee. He has more than 20 years of industry experience, and holds an MA in economics and the CFA designation. Like Schmeer, Rhonda Chang and Noman Ali have been involved with the fund since December 1998. They manage the mid-cap portion that makes up the bulk of its assets.
Kudos
- The fund's cumulative returns since the current management took over in December 1998 is more than double that of the Russell 2000 (39% versus 19%) and much higher than the median U.S. equity fund (-22%, excluding seg funds) or the S&P 500 (-18%).
Of Note
- According to management, turnover of the core portfolio has been just over 100% in each of the past two years, much lower than its overall turnover.
- The fund's average capitalization of stocks ranks it below 85% of all U.S. equity funds.
- Historically, to ensure breaking even, an investor needed to hold this fund for five years (based on monthly returns). This compares favourably to holding periods of six years for both the S&P 500 and Russell 2000 indices.
- Over the past three years, the fund's volatility has decreased to resemble that of the median, but the five-year standard deviation still ranks in the first quartile.
Mark Chow is an analyst with Morningstar Canada. Prior to joining Morningstar, he held positions in corporate relations and as an investment advisor licensed in both equities and options. In addition to his CFA charter, Mark has an undergraduate degree from the University of British Columbia. |
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