Disciplined Columbia Fund Rallies From Mediocre 2011

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Talk about a rebound. The $2.6 billion Columbia Large Cap Growth Fund slogged through a tough 2011. Its 3.03% loss lagged 59% of its peers tracked by Morningstar Inc.

So far this year, the fund was up 18.87%, going into Wednesday. That topped 95% of its direct rivals.

What made the difference? Doubling down on high-quality companies, say the fund's managers.

Over the past three years Large Cap Growth's average annual return is 14.23%, ranking in the top 24% of its category, whose average is 12.68%. The S&P 500 averaged 13.72%.

Lead manager John Wilson, 49 years old, and manager Peter Deininger, 41, talked shop with IBD from their offices in Boston.

IBD: Why has your performance improved so much this year?

Wilson: We increased our bias for quality names, coming into this year. We added some weight to our highest conviction names. In some cases, they had lagging earnings and/or revenues growth in the second half of 2011. And we reduced some of the lower end of our large-cap spectrum names. We pruned some midcap names where our investment thesis was not as crisp.

And we have not ignored the market's interest in dividend yield as an exponent of total return. When we think about a market operating in uncertain times, to the extent you can find high-quality names with a nice income component, that bolsters your overall return case.

IBD: Would you add to that, Peter?

Deininger: Another thing that's different this year is that, especially in the latter part of 2011, there's been a different efficacy in a strategy like ours that's more focused on stock selection. That plays into keeping our sector weights within a tight band vs. our benchmark (Russell 1000 Growth index). And we try to keep a majority of our risk budget emphasized toward individual stock selection.

Last year, especially late in the year, you had some broader factors driving overall performance. You had a market characterized by high correlations. This year there is lower correlation, which makes stock selection more important. That's our wheelhouse.

IBD: Yet one of your risk controls is to limit bets on individual names, right?

Wilson: We run a diversified portfolio. We have 70 to 90 names. We're not overly reliant on any one name. We limit our sector bets to within 3 percentage points plus or minus of our index's weightings.

IBD: What's your take onWatson Pharmaceuticals ( WPI )? You've built your stake for two straight disclosure periods.

Wilson: They launched a significant acquisition (earlier this year) of Actavis. Together, that will create the third-largest global generic pharmaceuticals company in the world. It will allow them to operate more on a global scale, have access to new markets like Russia and Eastern Europe.

Health care cost containment is a powerful theme around the world, not just in the U.S. Watson benefits. And the merger provides significant accretion in earnings for the next several years. We expect their earnings growth to be in excess of 15% annually for the next couple of years.

IBD: Pharmacy benefits managerExpress Scripts ( ESRX ) is another cost containment play, right?

Wilson: Right. Their merger with Medco Health Solutions will allow additional synergies and allow relatively powerful economies in purchasing and dispensing of drugs. It's a cost containment scenario, regardless of macro economics or who ends up in the White House.

IBD: Biogen Idec's ( BIIB ) quarterly earnings per share rebounded, growing 34% after falling by 2% the prior quarter. What's your view?

Wilson: It's a local company here for us in Boston. After a period of maturity the past several years, they're entering a new phase of growth. That's led by their new oral drug (BG-12) for multiple sclerosis. It is likely to be approved this year. It will be a powerful engine of growth. Patient compliance with oral drugs is much stronger than with injectables.

IBD: You got back intoEdwards Lifesciences ( EW ) two disclosure periods ago, after having exited this stock. What's your thesis?

Wilson: This is a health care company with a revolutionary product to treat heart valve replacements. The typical heart valve replacement is invasive and expensive. Edwards has come up with a product and delivery system (via a catheter inserted in a patient's thigh) to avoid cracking open a patient's chest.

This is a tremendous advance, especially for older patients where this product is approved. Some of these patients could not withstand an invasive open-chest procedure. This will materially expand the market, both in the U.S. and Europe.

IBD: What's your view onRegeneron Pharmaceutical ( REGN ), which was profitable from product sales for the first time in Q1? You opened a position two disclosures ago.

Wilson: It's a rapidly growing biotech company. Their lead product is Eylea, which is used to treat macular degeneration. That's a serious condition, which increases with age. And the aging U.S. and international population is growing.

Eylea met strong consumer acceptance. Revenue and earnings growth in 2012 has been faster than initially expected. We have a lot of conviction in this product.

IBD: Apple (AAPL) has had a great run, of course. Why should any shareholder expect that run to continue?

Deininger: In the near term, with several major product cycles in front of them, the case can be made for momentum in the company's business.

Another thing that plays to their advantage is their products are not just shiny new toys that come and go. They've created an ecosystem that keeps the customer coming back for incremental products instead of drifting to a glitzier phone or product from a competitor.

But going forward, there are few high volume markets left for them. Finding or making new high volume markets will be their greatest challenge.

IBD: What is drivingGoogle's (GOOG) run this quarter?

Wilson: Google still has the dominant position in search. They're doing better at monetizing things like YouTube, which is heavily trafficked. But the company has not yet delivered a lot of revenue and earnings growth from that product. Still, we think it is coming down the road. Its valuation is in line with the market from a P/E (ratio) standpoint.

IBD: Peter, tech is your bailiwick. What would you add, please?

Deininger: One thing that helps is that Google has a strategy for monetizing the shift to more mobile Internet usage. There has been growing skepticism about some social media Internet companies' transition to mobile use. But Google has shown a steep trajectory of ability to monetize them.

IBD: What's driving eBay (EBAY), which is also on a run?

Wilson: This story has been in transformation. EBay had gotten stale and suffered from a loss of innovation. Management embarked on a series of changes, which resulted in improved traffic and purchase volume.

Second -- and a powerful point more responsible for the stock's performance -- is the evolution of PayPal. The payment ecosystem started in eBay. It has spread broadly online. And it's being tested in a couple of real world offline opportunities.

That growth, plus the core eBay operation, led to the stock performance. We think it will continue to deliver solid results.

IBD: Teradata (TDC) has four straight quarters of earnings-per-share growth in the mid- to high 20 percentages. What's your play?

Deininger: This is one of the few pure plays that addresses an increasingly important area of spending in technology, and that is data analytics.

They have a number of systems, ranging from appliances to very high-powered systems that serve as repositories and analysis tools for companies' data. There is data growth at companies from traditional parts of their businesses as well as an increasing amount from Internet interactions. So there's growing need to manage that and analyze it.

Companies talk about Big Data, which is this explosive amount of information that is coming into companies. Teradata has some of the best technology for dealing with that. They are growing their share.

IBD: Why did you double your stake inAvago Technologies (AVGO) in your latest disclosure?

Deininger: Avago is a semiconductor company that is part of the supply chain that is enabling the radio frequency technology within the handset market. It is a growing portion of this business. And they have been levered to higher-end smartphones.

As you develop phones that operate as world phones in greater geographies and take advantage of new network technologies and still handle legacy networks, there is a growing need for the radio frequency products that Avago produces.

IBD: How do you seeAlliance Data (ADS), whose earnings-per-share growth has accelerated for two quarters?

Deininger: It's comprised of three portions. One is private label credit cards. That's been a growing business. They've gained share and acquired an attractive portfolio of retailers. That produces a tailwind of growth.

The second part is called Epsilon. It does a lot of marketing solutions.

The third part is built around loyalty programs. It's traditionally based in Canada, but is expanding into Brazil, a large new market for them.

All of these segments working together now is a dynamic we have not seen for a number of years. The nature of their business gives them visibility. So the three pillars give them a pipeline of business, giving them earnings growth. We expect that to continue.

IBD: Is TJX Cos. (TJX) a play on sluggish U.S. GDP growth?

Wilson: You hit it. TJ Maxx appeals to value-conscious shoppers. It has executed well. Given slow wage growth and high unemployment, value rings through to a lot of consumers. Comp store sales and their overall top line have done well the past couple of years. We expect them to sustain that.

IBD: Why did you begin a stake inDiscovery (DISC) two disclosures ago?

Wilson: It's a well run cable network, with global operations, executing well for several years. Their programming is relatively economical to produce. They don't have to do a lot to convert programs from U.S. viewing format to international , so their marketing is strong. Most people see cable as a good entertainment value. So within the world of consumer discretionary, cable TV represents pretty stable revenue and cash flow streams.

IBD: Which brings us toComcast (CMCSA). Why did you build your stake in your latest disclosure?

Wilson: Comcast is the leading cable programming provider. It has executed well in the last several years.

They are gaining share from some satellite and telephone companies. They've done a nice job of laying on additional products. And their high-speed Internet business performs quite well.

The company is pretty resilient to changes in macro economic demand.

So their profile is one of consistent growth, with little potential for economic disruption.

And they are trying to introduce products and services that reduce your dependence on being in your living room to watch Comcast.

IBD: Is Anheuser-Busch InBev a play on big international beer makers' growth in emerging markets?

Wilson: That's pretty much exactly it. This is a leadership name. It is a dominant beer franchise around the world. The company has been put together by a series of mergers in the last 10 years. They benefit from consolidation and geography and steady end consumption.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

Referenced Stocks: BIIB , ESRX , EW , REGN , WPI

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