Growth Stocks in Secular Upcycles

So for instance in mining, we've been very bullish on mining and materials, but not all of them. We're really focused on ones that are secularly challenged with supply. So we don't own aluminum. We haven't owned zinc or nickel, because they're both parts of the mining minerals industry, raw materials industry, where we're really not supply constrained. Aluminum occasionally, if we ran out of electricity, which we did in the summer of '08. But other than that, we're got plenty of bauxite, plenty of aluminum.

On the other side of it, copper is incredibly challenged. Oil is incredibly challenged. Metallurgical coal--you know, names like that. We're actually starting to do some work on some of the rare earth elements as another area that's very interestingly challenged.

Leggio: Great. And I wanted to talk about two interesting characteristics of your funds, since you do have a relatively long time horizon on your investment themes, the first being your use of cash. Most large-cap growth managers don't go to the cash positions that we've seen for you.

And secondly, your turnover ratio, which I know appears deceivingly high because you do a lot of trading around your positions. Can you talk a little bit about those two aspects of your fund?

Jordan: Sure. I'm going to start with turnover because I think that's the easiest one to address. Because we run a concentrated portfolio, 25 to 50 names, along a thematic bias with three to five themes, we're inevitably going to have more volatility than the average diversified, 125-name growth fund. So we think it's prudent to manage around the inevitable volatility of ideas.

You can have a stock that goes from $25 to $60 over two years. But it might go from $25 to $50, to $40, to $55, to $35, to $60. And what we will try to do is we will try to capture more of that as we go to try to reduce the inevitable volatility in a portfolio.

So when you look at our turnover numbers, they might be 100% or 200%, but if you look at what we call "new name" turnover, new name turnover is only about 30%. So only a third of the portfolio is really turning over every year. The rest of it is managing around our themes: lightening up when stocks get overbought, adding to them when they get oversold.

On the cash side of things, a couple of things. Number one, we're believers that near-term and medium-term, we're in an environment where it's going to be harder and harder to make money, that returns are going to get tougher, and that you are going to have to have money with managers who are willing to raise cash when the market is overbought and aggressively position themselves when it gets oversold.

And I think riding through everything fully invested does your investors a disservice. If nothing else, emotionally it makes it so that when you're down, you've got some ammo to put to work in your favorite ideas.

If you are fully invested all the way to the bottom, it's very hard to reposition the portfolio, which you may want to do, at the bottom. It's very hard to just slowly start selling names to buy other names. Whereas if you have built up some cash, it's much easier to either add to your favorite ideas, or in the interim, you may have found a couple of new themes that look even more interesting that you want to buy.

We think you have got to be more prudent and do the best you can for your clients, because that's what they are paying you for.

Leggio: Well great, Jerry. Thank you so much for joining us today.

Jordan: Appreciate it. Thank you.

Leggio: And thank you for joining us. This is Ryan Leggio for Morningstar.