Less Is More When the right stocks fill out a focused fund, a little can go a very, <i>very</i> long way.
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When a mutual fund has 80, 100 or 200 stocks in its portfolio,it's hard to call it a stock-picker's portfolio. Fullportfolios are usually described as "diversified"-in somecases, "over-diversified." One of the advantages ofdiversification is that it's supposed to lessen the performanceblow in down or volatile markets. The disadvantage is that highsmay be hard to reach.
The portfolios of nondiversified funds like Van Kampen'sFocus Equity Fund typically have only a few dozen stocks. The rightportfolio manager-assuming he or she can hone in on the rightstocks at the right time-can make a nondiversified fund sing.
But that hasn't always been the case. In the 1980s, focusedfunds had a hard time topping charts. What changed that?Technology.
"I think the time sensitivity has changed," says PhilFriedman, lead co-manager of the Focus Equity Fund. According toFriedman, the portfolio manager who had the edge in the 1980s wasthe one who got the first call back from a company's CFO. Butas conference calls replaced phone calls, hundreds of people-notjust those on the other end of the line-were privy to breakingcorporate news. Today, corporation news spreads instantly via theInternet-and goes out to millions. To get ahead, Friedman says,"You need to react yesterday to tomorrow's news."
Friedman has worked in the financial industry for nearly 20years and knows the power an information edge can bring. "Wetend to be very research-intensive," says Friedman. "Andwhether it's meeting management at their offices or pushingaggressively to have management come to ours, you have to go beyondreading the 10K and look management directly in the eye. That'svery important to us."
The strategy has paid off. At the end of 1999, the fund was up45.7 percent, well ahead of its peers and the S&P 500.You'll find between 35 and 45 stocks in the Focus Equity fundwith the top names making up 46 percent. That kind of concentrationmeans every name counts. So when looking for companies, it'sthose showing growth momentum rather than price momentum thatattract Friedman.
When screening companies, Friedman generally looks for thosewith earnings growth of at least 15 percent and whose businessesare as good as, if not better than, what Wall Street thinks."You don't buy stock because everyone believes it's agrowth stock," he says. "You buy it because you believeit is."
Friedman likes to invest with that kind of conviction. Thedownside? Pick the wrong stocks and fund performance could suffer.But with about 32 percent of Focus Equity's assets invested intech stocks at year-end 1999 and names like Cisco represented, sofar he's been in the right place at the right time.
"People think concentration leads to higher risk,"Friedman says. "We believe concentration leads you to betterunderstand the portfolio and the names that you own." Andwhile that's true, don't take the risk factor too lightly.The smaller the handfuls, the greater the risks may be.
Dian Vujovich is a nationally syndicated mutual fundcolumnist and author of 101 Mutual Fund FAQs (Chandler HousePress). For free educational mutual fund information, visit her Website, www.diansfundfreebies.com.
At A Glance
Fund Name: Van Kampen Focus Equity Fund (MSQAX)
Managed By: Van Kampen Investment Advisory Corp.(Subadvisor: Morgan Stanley Dean Witter Investment Management
Portfolio Manager: Phil Friedman (co-manager: BillAuslander)
Total Assets: $518.5 million
Top Holdings: Tyco Intl., Cisco Systems, UnitedTechnologies, Micro-soft and General Electric
Average Annual Return: 33.2% (since its inception in1996)
Maximum Load: 5.75% (on Class A shares)
Total Expense Ratio: 1.5% (including 12b-1 fees)
Minimum Initial Investment: $1,000
Management Fee: 0.9%
Phone: (800) 421-5666
Web Site: www.vankampen.com
Figures are as of March 31, 2000.
