Keep It Simple, and Profitable
BOSTON — Jeffrey Poppenhagen has been riding a rocket.
Shares in the mutual fund he manages, Pioneer Growth Shares, have risen some 23 percent this year, well above the 16 percent gain in the Standard & Poor's 500 index, a broad measure of market performance. Relatively few mutual funds invested in stocks have beaten that average this year.
Mr. Poppenhagen's rocket has been fueled by the strong price gains of "big-cap growth stocks."
These are the major companies of the stock market, and investors have snapped them up. They are regarded as the engines of growth in the economy as well as relatively safe places in a time of financial uncertainty elsewhere in the world.
That trend has "greatly helped" the performance of his $1.5 billion portfolio, Poppenhagen says. His fund is part of the Pioneer group of mutual funds ($23 billion under management) based in Boston.
His stock picks since joining Pioneer in 1996 include Dell Computer (5.5 percent of his entire portfolio as of May 29), Coca-Cola (3.8 percent), Wrigley (4.4 percent), and McDonald's (4.1 percent).
He picks these companies, he says, based on a strategy that tells the story of the bull market of the 1990s.
Poppenhagen goes for companies with "defensible business franchises." Some dominate or lead their markets. They all boast an advantage of scale, with strong distribution systems and research and development capabilities. In a low inflation environment, they tend to deliver steady increases in profits.
Dell, for example, sells its computer directly to customers - over the phone or the Internet. This reduces sales costs (smaller sales staff and no retail outlets to maintain) and inventory (the computers are made to order and therefore don't stack up in some warehouse).
Global consumer-product companies, such as Coca-Cola and McDonald's, should thrive with the rapid growth of middle-class consumers in emerging markets - including nations in Asia or Latin America, Poppenhagen says. These companies have already endured the costs of setting up foreign networks and are now reaping the rewards.
He regards such indirect investments in emerging markets as preferable and less risky than buying the stock of companies headquartered in these markets.
Poppenhagen's second strategy involves concentrating his portfolio in relatively few stocks - 33 at the moment, compared with the 150 to 200 companies considered normal for many funds.
Poppenhagen figures he can better understand the companies in his portfolio when there are fewer of them.
Will his success last?
William Goetzman, a Yale School of Management expert, is dubious. Poppenhagen's basic approach is called "growth investing" - buying stocks of companies whose profits are expected to grow.
But over time, another strategy generally outperforms growth investing, Mr. Goetzman says. "Value investing" - looking for companies that, despite strong fundamentals, have not participated in the rising market - has done best in the long run.
So far, however, the market has proved Pioneer right and academia wrong. Pioneer Growth Shares has had a good run. The price of its shares rose 40.9 percent in the past year through June 31, well above the 27.05 percent of the S&P 500.
And its three-year compounded annualized return was 36.5 percent, besting 30.24 percent for the S&P index. It ranks among the top 1 percent of growth funds, according to Lipper Analytical Services, New York.
It also shines in comparison with a sister fund, Pioneer II, which follows a value strategy. Its annualized return is 19.5 percent in the past three years.
Poppenhagen's favorite stocks right now are Monsanto (6.5 percent of portfolio), which is merging with American Home Products; Pioneer Hi-Bred International (5.2 percent), which is big in agricultural bio-tech; and Minerals Technologies (4.9 percent), which makes "precipitated calcium carbonate" for the paper industry.
The dog of his group is Sealed Air Corp. (3.7 percent), off 40 percent since April.
As for Internet companies, much in the news lately, he says doesn't see any company with a long-term advantage over competitors.
"But it's an industry to watch," he says.
Simply put, Pioneer Growth Shares performs well because it's full of companies that outperform competitors.
Fund manager Jeffrey Poppenhagen says he picks "franchises" that dominate their markets. His picks and comments include:
Coke and Pepsi may still slug it out in the US, but "internationally, the war has been won by Coke. Pepsi will never be able to challenge Coke internationally and the Coke franchise is unduplicateable."
"McDonald's biggest advantage in the long term is that they've spent a few decades now building a global franchise and that's something that their competitors really can't talk about or do.
"People know what McDonald's stands for. In the long run, there is more growth internationally than there is domestically, and that's clearly why I own the McDonald's franchise today."
"If I ask you to think about chewing gum, everyone can name Wrigley's and nobody can name anyone else in the business."
Wrigley's still controls about 50 percent of the business in the US. But "in a lot of these international markets, Wrigley's share might run as high as 70 to 90 percent.... When you compare its very high profitability, its dominant franchise, and its growth rate, it's a very compelling story."
Dell, by selling directly to customers, enjoys several advantages over competitors. It talks with customers every day to learn about their needs and reduces inventory because it manufactures computers to order. "That's very important in the PC industry where the value of components falls about 1 percent per week ... a giant competitive advantage."
Progressive writes insurance policies for high-risk drivers and owners of high-performance sports cars (like Ferrari).
What excites Poppenhagen is its entry into the everyday auto-insurance business. He says the company's profitability, industry clout, and its move into direct auto-insurance sales has produced "a very powerful performer and a very strong grower over the past couple of years."