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What RS Uncovered in Tech and Energy

Ryan Leggio

Ryan Leggio: Hi, I'm Ryan Leggio. I'm a mutual fund analyst here at Morningstar. With me today is Allison Thacker, co-portfolio manager of multiple RS growth funds. Allison, thanks so much for joining us.

Allison Thacker: Great, thanks for having me here.

Leggio: Allison, something I wanted to ask you about was the new team structure that RS implemented on multiple funds earlier this year. I was wondering if you could talk a little bit about what you see as the advantages of managing a mutual fund in a team structure.

Thacker: Sure. We actually started this process originally with our technology sector fund. What we found was that the team structure allowed deeper research expertise to be closer to the portfolio. In 2006, we were looking at a lot of our diversified funds. We realized our research organization was surfacing a lot of really excellent stock ideas, but that maybe they weren't getting into the portfolio at the correct weighting, or perhaps not at the correct entry price.

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So in early 2007, we moved our small-cap growth fund, RSEGX, into this model. Subsequently, that sprang the select growth fund, RSDGX. We've really seen strong improvement in performance, basically because of exactly the premise that made us move to this structure, which was as you have very senior experienced research analysts serving as portfolio managers on these products and thinking like portfolio managers, you can really capture better performance from the average stock that you put into the portfolio on an entry point and exit point perspective.

Leggio: Great. Since the team managed structure was in place during the recent market downturn in March, and since you have the benefit of looking at not only large-cap growth stocks and your funds, but also mid- and very small-growth stocks, were there any particular sectors or cap sizes that got really cheap in your view that you guys were buying?

Thacker: Well, we did see a lot of companies that had been small caps, and during the mid 2000s, they'd run up to be mid-cap stocks. A lot of investors had discovered them. During this downturn with the sell-off, they came back to being small-cap stocks again. These companies were in the $1.5 billion to $3 billion market cap range. We were really able to upgrade the quality of some of our portfolios with some of these great long-term growth companies that we knew very well. We felt still had very strong growth prospects for the next five years, and move them into our smaller-cap and SMID product.

Similarly, I think we saw the same opportunity to buy some formerly large-cap names into our mid-cap product as well. It's been really interesting. Specific sectors where we've seen really great opportunities would include technology. Also I would say energy as well.

It was interesting, during the sell-off in energy at least. You saw similar sell-offs between very high quality, what we think of as secular growth energy companies, as well as just commodity-oriented energy companies. The entire OSX, oil services index, had strong correlation among all the stocks within it.

We were able to pick up some great long-term growth stocks at tremendous values in the fall. Similarly in technology, we were really attracted to this sector because it has a strong cash flow characteristics and low debt rates.

A lot of the software companies and semiconductor companies learned their lesson in the last recession. They were not over levered; they didn't have big pension overhangs.

They sold off just as much as any other group in the market but were fundamentally healthier from a financing perspective. They don't need outside capital markets to grow.

We really took up our investments in the technology sector. We were able to buy some great long-term franchises at 10 times cash flow. Which is a great long-term valuation to get in at.