Harry Milling: Hello, I'm Harry Milling, Morningstar mutual fund analyst, and I'm here with Joe Milano, T. Rowe Price New America Growth Manager, an excellent fund and one of our early contenders for "Fund Manager of the Year." Joe, good that you are here.
Joe Milano: Thanks for having me.
Milling: You have an interesting strategy with this fund for a growth fund. It is sort of a two-bucket approach. One bucket, more durable growth companies, and the second bucket, more established mature growth companies. Could you describe how that works?
Milano: Sure. What we are trying to do is build a portfolio that blends out to be a large-cap growth fund, pure growth fund. And what we found is that in order to really get to the growth rates that we want, what we tried to do is blend, as you said, some of the more mature growth companies that may grow their earnings over the course of a cycle 10 to 15 percent--companies like the Wal-Mart or Lockheed-Martin--and balance those with some names in the mid-cap space that might grow 15 to 20 percent over a multi-year, think about those as more durable growers. And kind of blend the portfolio out to a large-cap growth fund that has a little bit more growth maybe than the average.
Milling: And I have noticed that one of your top holdings is Henry Schein, not a well-known firm for many investors, tell us about that and how that exemplifies the process you just discussed?
Milano: Henry Schein is one of the mid-cap names that I would call a durable multi-year grower that I have owned in the fund for several years. It is a company that distributes medical supplies, mainly dental supplies in the United States, but also distributes medical supplies here and overseas and also distributes the flu vaccine, which is a seasonal business. It tends to benefit their fourth quarter.
But it is an interesting company. The market for dental is very fragmented on the distribution side. Dental is a very, very durable growth end market. People tend to like to have their teeth cleaned, and it is an aesthetic thing and is ingrained in most cultures that are developed and there is a growth platform for countries that are developing.
And so Schein is a company that can grow their earnings I think in the mid-teens over a very long period of time without really stretching the model. And so, it is a company that I own as a mid-cap name, but part of my thought process is, over time, it should be a large company.
Milling: Right. But just to flush that out a little bit with this two-bucket approach. The one bucket, more durable growth, sometimes you will own those companies, they are more durable growth, so you will own them possibly for three, five years they will be in the portfolio, whereas some of the more mature growth companies possibly not as long, is that correct?
Milano: Yeah, that is true. I mean I'd say I tend to have a longer leash on companies where I think the growth is longer dated, so if there is a company in the portfolio where I believe you can look out five-plus years as opposed to two to four years, let's say, I might have a longer leash, you might stay around the portfolio a little longer.
I think the power of growth investing is compounding earnings growth, and you want to let your companies compound, so in growth I tend to not want to own a growth company for one year because you are really taking away the most powerful thing about growth investing, so you can find a company like a Henry Schein that can grow 15 percent every year for five to seven years. That gets pretty powerful in year five, six and seven.
Milling: Right. Some of those more durable growth companies have actually run up quite strongly year to date, and I would imagine that presents a certain amount of risk for the fund, so how are you handling that going into year-end?
Milano: Well, you are right. I think since the market bottomed in March, that part of the portfolio has gotten a little more expensive relative to the more mature growth companies and probably does present a little bit more valuation risks. At the margin, I'd say I am starting the process of leaning into buying a little bit more of the mature growth companies, companies like the Wal-Mart, St. Jude Medical, and a little bit away from companies that have performed extremely well.
And in many of those cases, Harry, we are taking a little bit off the table, I am not going to eliminate Henry Schein. Henry Schein is a core position that I have known for a very long period of time, but a position that's 2.5 percent of the fund on my take. That position is 1.5 to 2 percent depending on where the price is and go from there. But at the margin, you are right, there is a little bit more risk in that part of the portfolio, and we are slowly kind of rotating I think as the market continues to run up, you will see more of that through the end of the year.
Milling: And lastly, that could impact performance if these more durable growth companies continue to rally, are you concerned about that at all in the short term?
Milano: I guess the way I think about it, Harry, is, I think about performance over very long periods of time, and I have run the fund seven years and I kind of have a pretty long-term view of performance. I am not so concerned about potentially lagging in Q4 if I get too defensive too soon. I also don't want to overstate how defensive I am getting. There is plenty of balance in the portfolio and plenty of names that would continue to benefit if the market continues to sort of melt up higher.
So, I have a positive stance actually toward the market and toward the portfolio. It is just a feeling that maybe at the margin, I should slowly be leaning into things, and it is really doing that more with a view of 2010, not so much 2009, and in some sense 2009 is going to be what it's going to be, but I think now is a good time to start to really think about positioning for 2010 as most of the market is so focused on year-end.
Milling: All right, we will leave it there. Thanks for coming.
Milano: Thank you.