Top-Performing Midcap Blend Funds
Posted on May 16, 2008 in the Mutual Funds category
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Midcap blend is that sweet spot in the market between growth and value stocks. A blend fund is a fund that buys enough growth and value stocks to being categorized as either one of those groups. Managers either jump back and forth across the divide as needed or tend to hold a steady array of each kind.
What got my attention is that the MidCap Blend Funds is the second best performing group for both year-to-date and the past five years, according to Morningstar Inc. For the past five years, Midcap Blend Funds returned an average annual 13.51% vs. 10.25% for the S&P 500.
Within this group here are three funds that have been top performers in this group over the last five-years.
Fidelity Leveraged Company Stock:
As its name implies, the 173 companies in this $7.5 billion fund have loads of debt on the books.
“Debt doesn’t have to always be viewed as a four-letter word,” said manager Tom Soviero. “Used correctly it could actually be fruitful to the shareholders.”
Many companies in the fund may be considered high-risk, noninvestment grade or junk-bond issuers. But these debtors sport solid cash flow, earnings and sales figures. Soviero’s army of 25 research analysts sniff out companies with high quality management, competitive market positioning and new products.
“Whether you raise the debt to do a strategic acquisition or buy back stock, there are opportunities to accelerate the bottom line with leverage,” Soviero said.
Soviero also takes into account industry conditions. He started loading up on energy in 2005 on the thesis that China and India’s growing demand would drive up oil prices.
Energy, the fund’s biggest sector, makes up 34% of assets. The fund’s top performers: Alpha Natural Resources (ANR) and Stone Energy (SGY) exploded 267% and 100%, respectively, in the past 12 months.
Aston/Optimum Mid Cap:
This $947 million fund concentrates on 35 to 40 companies with growing sales and that on a P-E basis trade at a discount to the S&P 500. It could be considered a nemesis to Leveraged Company Stock. It prefers companies with little if any debt.
“The portfolio’s current weighted average debt-to-capitalization ratio is just 24%, compared with 30% for the S&P 400 MidCap Index, 34% for the Russell Midcap Index, and 32% for the broader S&P 500,” manager Thyra Zerhusen said in a client note.
To cushion the blow from a slowdown in the U.S., Zerhusen loaded up on companies that get more than 50% of their revenue from foreign markets. It’s most heavily weighted in technology (25% of assets) and business services (19%).
Hodges:
Don and Craig Hodges, a father/son team manage this $620 million fund. They buy companies of any size from both the growth and value camps. The fund includes well-known blue chips, out-of-favor names and the obscure. The Hodges apply a bottom-up approach to find companies with above-average earnings growth. They reserve the right to short-sell stocks to profit from falling share prices.
Currently, they have big bets on oil and companies in their home state of Texas. A quarter of the fund’s 77 stocks relate to energy and about a third reside in the Lone Star state. They also are overweighted in companies involved in developing infrastructure, industrial equipment and railroads.
Their biggest positions, railroad operator Burlington Northern Santa Fe (BNI) and oil-field servicer Schlumberger (SLB) and offshore contract oil driller Transocean, (RIG) have shot up 17% to 55% in the past year.
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