Persistence and patience pay at top-quartile TD U.S. Mid-Cap Growth Fund
FundGrade A+® Award winner
The past year has been pretty good for U.S. equities, particularly large caps, but not so great for U.S. small/mid-caps. While U.S. equity funds overall generated an average 12.4% return for the 12 months ended Nov. 30, 2019, the corresponding figure for U.S. small/mid cap funds was a sub-par 6.7%.
Given the reverse is usually true – small/mid-caps generally outperform large-caps over the long term – one wonders what’s come into markets south of the border lately.
According to John Wakeman of Baltimore, MD-based T. Rowe Price, who together with Brian Berghuis, manages the multi-year FundGrade A+ Award-winning TD U.S. Mid-Cap Growth Fund, the reversal derives largely from a market ethos that has come to ignore value, as has happened at various times in the past. And while Wakeman has avoided the lot of many of his peers (with a 16.6% return for the 12 months through the end of November and a 10-year average annual compounded rate of return of16.5%), he acknowledges the perils.
“The market is no longer interested in valuations, and that’s not good for what we do,” Wakeman admits.
“In 1999, for example, before the tech bubble burst, it was a struggle for us because valuations didn’t matter any more. It’s like that now – people want growth, and they don’t care what they pay. This is the new normal, and with interest rates not rising, that’s like a get-out-of-jail-free card.
Indeed, by year-end 2019, both the Dow Jones Industrial Average (DJIA) and S&P500 price/earnings ratios were toying with a price-earnings ratio of 25, well above historical averages of around 15. The S&P500 index was up almost 28% on the year, while the DJIA was up 22%. In other words, most of those market gains were not backed by earnings increases, but by speculation.
“The market numbers may seem good, but it’s not our kind of market,” says Wakeman. “We’re very much bottom-up investors. We’re very disciplined, and valuations are important to us – we’re kind of GARPy [Growth at Reasonable Price] in that respect.
“We like to find management teams that we know and trust, who are aligned with us and can grow the company,” Wakeman adds. “We don’t like a lot of debt. And we tend to hold onto good companies – our turnover [percentage] is in the low 20s, and the average holding period is three to five years. Buy and hold works for us, and it helps our shareholders.”
When it comes to the selection process itself, Wakeman notes that having a pool of 150 analysts at T. Rowe Price is definitely an advantage, and has led to a portfolio of names that aren’t familiar to most Canadians: Teleflex Inc., Hologic Inc., and CooperCompanies Inc., for example, all providers of medical technologies and/or health care services, are currently the fund’s top three holdings.
The fund has been underweighted lately in tech stocks, and while Wakeman admits that “this has hurt us because they’ve had the fastest growth,” he has no regrets about avoiding some of the biggest winners. “High fliers tend to correct really hard,” he says.
For the rest, it’s business as usual. “We’re plodders,” Wakeman says. “In up markets we have legs and we tend to outperform. When the market is like this we struggle, but we believe value matters and we’re sticking to our principles, like we’ve been doing for the past 28 years.”
Of course, when you’re generating returns averaging 16% a year, words like “struggle” and “hurt” do evoke some cognitive dissonance.
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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