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business newsLeading 5-Star Manager Reveals Stock Picks
By
Josh Lipton Mar 03, 2011 3:50 pm
The manager of two five-star funds offers his top picks.
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“I loved business, but I knew I didn’t want to run a restaurant,” Tasho remembers. “There were too many things that could go wrong. I wanted something where I could be more focused.”
Instead, Tasho dedicated himself to the money management business, where he has dished up tasty returns for his investors. Today, the 56-year-old is the Chief Executive Officer and Chief Investment Officer of Alexandria, Virginia-based TAMRO Capital Partners, an investment adviser specializing in US equities, and co-portfolio manager of two well-regarded funds: the Aston/TAMRO Small Cap Fund (ATASX) and the Aston/TAMRO Diversified Equity Fund (ATLVX).
Through March 2, ATASX’s 10-year annualized return of 10.71% handily bests its benchmark, the Russell 2000 Index, and leads its Morningstar rivals by 5.46 percentage points, ranking in the top 1% of its category. The fund, with $1 billion in assets and an expense ratio of 1.34%, is currently closed to new investors.
ATLVX’s results prove similarly impressive: Through March 2, the fund’s 10-year annualized return of 5.39% outperforms its benchmark, the Russell 1000 Index, and beats its Morningstar competitors by 3.59 percentage points, landing in the top 3% of its large-growth category. The fund, with $20 million in assets and an expense ratio of 1.20%, requires a minimum investment of $2,500.
Morningstar awards both funds 5 stars, its highest rating.
Recently, we caught up with Tasho to talk about his investment strategy, top stock picks, and what he learned from Warren Buffett. For more, please read on.Minyanville: Let’s begin with an overview of your investment process. You have a simple mantra at TAMRO: “buy the best when they’re depressed.”
Tasho: You really want to invest in companies with great competitive advantages. It comes down to three basics: does the company have a strong, core business with a leading market share? Also, management is important, specifically the CEO, President and CFO. We like to see that these three people have worked together for a long time. We want to know, even when times are tough, how management performs.
Lastly, we want to see companies with good financial flexibility. This gives companies an edge especially among the small-caps, where access to the capital markets is never a given.
Minyanville: Also, companies have to sit comfortably into one of these three categories: Leaders, Innovators and Laggards.
Tasho: Right, we want to see repeatable patterns of success. Leaders are best of class companies that have done well relative to their peer group for a long period of time. Innovators are in shorter cycle sectors such as Technology and parts of Health Care, where the offering of a product or serve is shorter cycle. So, in order to be innovative, they need to dedicate a percent of revenues into R&D consistently.
Finally, there are the Laggards, which have a strong, core business but there is something missing in the equation. However, by bringing in the right executive, we think they have the ability to become Leaders.
Minyanville: What characteristics do these three groups share?
Tasho: They have that competitive advantage, which will serve the test of time. Also, what makes for a great investment is the price you pay for it. So we spend a lot of time on valuation. We look for a minimum of three times the upside in the stock price versus the downside potential, which gives us a bit of a cushion.Minyanville: Who are some of the investment gurus that you admire?
Tasho: The one investor I admire the most is Warren Buffett. He’s patient. He waits for the perfect pitch. One time, a journalist asked him what he doesn’t focus on and he said the “near term.” I thought that was perfect. When you focus on the near term, you start to extrapolate and think that’s the new trend. So, some company misses on one quarter and then everybody thinks it’s now all over. But for Buffett, and for us, that’s really the opportunity.
Minyanville: Let’s drill down more specifically into the large-cap fund. Broadly, you believe the leadership baton could actually pass from small-caps to large-cap stocks this year. How come?
Tasho: Yes, I see so many large-cap companies that have been correcting in terms of their valuation over a long period of time. A lot of these companies are looking attractive. Also, we’re seeing better execution from these companies. And there is more cash on their balance sheets than we have seen in a generation. This gives them financial flexibility: they can increase payouts, repurchase their shares or buy smaller companies, which gives them another leg of growth.
Minyanville: The portfolio is now positioned to benefit from several powerful trends: cloud computing, an emerging global middle class and global industrialization.
Tasho: The growth will be overseas. We’re already even seeing that among the small-caps, which are now seizing the opportunities in terms of what is needed. Among the large-caps, one area we saw in this emerging middle class theme is the auto market. There are more and more people driving cars around the world. A company like Johnson Controls (JCI), which really manufactures everything inside the car, has a truly global reach.
Also, this is really the first time in the history of our firm in which Technology is one of the leading sectors in our portfolios. The smartphone started it and Apple’s (AAPL) iPad is continuing it and we could very well see the evolution from a corporate desktop to an iPad-type product. The flexibility and mobility of getting access to information anywhere is extremely important.
I also can’t emphasize enough how revolutionary and important the trend of cloud computing is. It is a great way for companies to lower costs dramatically. Put it this way: Amazon (AMZN) is one of the largest retailers out there and the store you go to is on your computer. Minyanville: What other trends are you playing?
Tasho: Another trend we look at here is diet. There is this emerging middle class and these people are improving their diets. They’re eating more protein, which means we have to grow more grain. It takes about eight pounds of grain to produce one pound of protein. So we like fertilizer companies like Mosaic (MOS). We like Monsanto (MON), which has the leading technology in seeds, and we like AGCO (AGCO), which is one of the largest independent farm equipment companies.
Minyanville: Let’s move on to the small-cap fund. Taking a step back, you argue that 2011 could be another good year for US small-cap stocks.
Tasho: It will be a good year. Now part of that is because 2008 was the third worst market ever. That fear is still out there, both on the institutional and retail sides. From a macro perspective, interest rates are low and the Federal Reserve is really hitting the accelerator. As for fiscal policy, the November election gave the signal that taxes and regulations, which is what business is worried about, were beginning to move more toward the center. We think that’s a positive.
Now we do think it will be a slow expansion. But 2% or 3% GDP growth is a good environment for the markets. Sentiment should improve. Valuation remains attractive. So the trends are such that we should still see flows coming into the markets.
Minyanville: Let’s talk about a couple top picks in the small-cap portfolio.
Tasho: RightNow Technologies (RNOW) has a bit of different niche. It provides software targeted to call centers and help desk operations, accessed via the Internet as a low-cost service. The company is taking advantage of that cloud computing in order to reach their customers. RightNow continued to grow despite the overall drop in IT spending due to the economic crisis. The opportunities there are still significant.
Minyanville: One more pick, please.Tasho: The big trend in Healthcare in general is that you need to find a way to drive down costs. So we like Athenahealth (ATHN), which provides software and services that automate small physician offices.
For example, the company provides electronic health records. It’s been growing at a 30% compounded annual growth rate for 10 years. And they only have 3% market share. There is tremendous demand for their service. It’s a great way for these small physician practices to reduce their costs and become more efficient.
Minyanville: Thanks for your time.
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No positions in stocks mentioned.
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Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
