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Positioning for an Upturn

Karen Dolan, CFA

Karen Dolan: Hello, my name is Karen Dolan. I'm Morningstar's director of fund analysis. I'm here today with Clark Winslow.

Clark started Winslow Capital Management back in 1992. At this point one of your biggest responsibilities is subadvisor of the Mainstay Large-Cap Growth fund.

Clark Winslow: That's correct.

Dolan: Currently serving as CIO of the firm--very involved in the day-to-day operations and the direction that the firm is going. I would love to hear a little bit about your strategy today, Clark. Also how you've been navigating this market environment that has definitely been quite a roller coaster.

Winslow: It sure has. I think we had about two or three generations of experience in the last 12 or 18 months. It's been quite something.

We appreciate being here today, Karen.

I'll give you a little overview of what's happened in the portfolio. Essentially going back to January when we were looking at things apparently being very bleak. Everybody was despondent about the outlook.

We came to the conclusion that a lot of the natural forces that take place in the economy with businesses and consumers would lead to the maximum negative rate of change in the economy in the first quarter.

When you combine that with the fact that you were looking at stocks down over 50% from their high in October 2007, it looked to us that if we could get some conviction that the economy would be picking up sometime in the latter part of the year that it was a major opportunity to reposition the portfolio for an improved economy and an improved stock market.

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We went down about in line with the benchmark in 2008. That was after being ahead of the benchmark by over 1,000 basis points in 2007.

What we did, concluded and looking particularly at what was going in the financial markets because we couldn't see a resumption of growth in the economy without an improvement and unfreezing in the credit markets, and we could begin to signs of that. Whereas we also believed that because of the deleveraging going on in the consumer area and the need for the consumer increase of the savings rate that the upturn was likely to be slower than it had been in the past.

Furthermore, we've never had a situation since the '30s where the financial institutions have been so negatively impacted and thus the ability for the economy to grow, impaired.

Nevertheless, within that environment, we thought looking at both valuations--the prospect of improvement at some point in the second half of the year--there was a good opportunity.

What we did was to reposition the portfolio over the last six, nine months actually, to go from an underweight in technology and an underweight in energy to an overweight in both; looking for them being beneficiaries of eventual improvement in revenues and with all the cost-cutting that's going on, a very strong upward move in earnings.

In the technology area we emphasized the companies that we've owned for some time that are really dominant industry leaders. We're down at about nine or ten or 11 times earnings.

Looking at a company like Oracle or Hewlett-Packard. We also stepped up our positions, increased the position weight, in some of the faster growers such as Apple, Google and Qualcomm.

We also then began to add a little bit more of a cyclical sensitivity to the portfolio by buying Marvell Technology in the semiconductor area or Lam Research in the grid circuit testing area--and few other companies like Adobe and Autodesk and so forth. Again to be positioned for the upturn.

One of the other areas is the energy area. We went from an underweight to an overweight. Viewers might ask, "Well gosh. Anybody that's looking at the numbers you can see that ... the inventory of natural gas, and oil, and gasoline are right near or above the five-year average high."

However we're looking at a little bit longer term and basically seeing that despite all the talk from Washington nothing has been done about energy policy. We have no increased perspective ability to be producing more oil and a very spare capacity. I mean two, three, four million barrels out of an annual consumption running this year about 85, 86 million barrels per day worldwide.

In fact, when you look at the growing economies, continuing to grow this year and accelerating--China, India and so forth--they are the least efficient users of energy and the fastest-growing users of energy.

This is combined with the fact that a lot of the suppliers or sources of energy have been adversely impacted from the recession. That is, independent producers couldn't get financing so they curtailed their exploration. That also negatively affected the service companies, so they have scaled back. What happens is as demand picks up and you have this very tight supply situation, prices will be rising further. There will be a big demand again for further exploration, further service companies.

We have gone back on the resource production side to increase our holdings in Southwestern Energy, which we've had some years, the natural gas producer of shale down in Fayetteville, Arkansas.

We've taken a position ... with Suncor with their oil in the tar sands up in Canada. We took a new position in Petrobras because of the big find off the coast of Brazil. All of these three increase unit production, so we're not speculating the prices going up and try to benefit from that. We want to see price likely but unit increase production.