The US economy is recovering slowly, and despite some areas of
concern, the global economy continues to strengthen. Look to this
fund to capitalize on improving economic and industry trends by
picking up shares of profitable companies.
Touchstone Mid Cap Growth
(TEGAX) has produced steady returns over the years under a trio of
managers, Susan I. Suvall, John A. Gibbons III and William
The fund's management team takes a fundamental, bottom-up
approach to investing that carefully scrutinizes all aspects of the
fund's current and potential holdings. The team builds earnings
estimates internally and each member spends roughly 20 to 30
percent of their time on the road visiting the individual companies
in the portfolio.
"We like to get to know the management teams to better assess
the state and direction of the firms," Muggia said.
Despite having a strict screening process, there's no specific
calculated range in which a company's fundamentals must fall for
Management has recently found significant opportunities in
emerging markets. The team increased the fund's positions in the
technology, industrials, energy and materials sectors, which now
account for Touchstone Mid Cap Growth's largest sector
"We have the flexibility to move into whatever industry presents
the strongest growth potential," Muggia said. "These industries are
where we expect the highest growth right now, whereas historically
we looked to health care and consumer discretionary stocks."
Management favors the energy sector because of what Muggia calls
"an undeniable lack of oil supply" on a global basis. While oil
prices have hit record highs, producers have failed to raise
production to a commensurate level.
The world's "easy energy" has already been exploited, requiring
increasingly complex and expensive technologies to both find and
drill for energy resources. Emerging-market economies will need
massive amounts of resources of all stripes to fuel growth. All of
this will only raise global demand for oil
Oil services companies such as Weatherford International (
) are in the sweet spot to profit from these long-term trends.
Future oil drilling will require more money to be allocated to
servicing oil rigs. As pricing for these critical services
increases, Weatherford and its peers will benefit greatly.
In the technology space, management seeks companies with an
attractive risk-reward spread through a barbell strategy that
encompasses both fast-growing companies and conservative names.
Firms like Red Hat (
) or Akamai Technologies (
) may not garner flashy headlines, but they're rapidly growing and
increasing their market share.
More conservative growers such as Autodesk (
) and Nice Systems (
) boast stable and dominant businesses, strong free cash flows and
defensive market positions.
The team is also bullish on industrials. This space suffered
massive capacity losses as firms reduced their workforces and
closed plants to survive the 2008-09 meltdown. But the sector is
now getting back on track.
"Our industrials are some of the most well-known distributors in
the industry," Muggia said, noting that many of these industrials
have significant exposure to high-growth emerging markets.
Management also believes that the materials sector provides
exposure to the growth of food- and agriculture-related industries.
One such company is Crown Holdings (CCK), a firm that packages
consumer goods. Crown Holdings benefits from an expanding presence
in Europe and the emerging markets. The stock represents a back-end
play on a US economic recovery.
Touchstone Mid Cap Growth is well-positioned to benefit from a
recovery in cyclical sectors that will improve in step with the
broad US economy. The automotive industry is one such sector that
may surprise investors as the economy finds its footing.
Muggia and his team have identified two non-traditional names
that will benefit from the auto recovery: Solutia (SOA) and Lear
Corp (NYSE: LER).
Solutia is a specialty chemical company that produces plastic
films for car electronics. The firm is also the leading provider of
rubber chemicals used to manufacturer vehicle tires. As consumers
regain confidence and purchases of cars and auto parts rises,
demand for Solutia's products will increase. Management also likes
the firm's exposure to emerging markets, where auto sales remain
Automotive supplier Lear Corp is gaining market share for key
electronic components in new cars. The firm's productivity is
strong as is its earnings growth potential.
The fund favors a concentrated portfolio of around 50 holdings.
As is the case with portfolio additions, management only sells
holdings after a thorough and disciplined analysis.
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