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Hartford Capital Appreciation Shines

Brett Arends

It isn't easy following in the footsteps of one of the best funds around. But (HCTAX)Hartford Capital Appreciation II (HCTAX) is certainly off to a great start.

Since it was launched just under two years ago, the fund has returned 41%. Not only is that nearly twice as good as Wall Street over the period -- it's even beating the original fund, (ITHAX)Hartford Capital Appreciation I (ITHAX), by a small margin.

Both funds are managed by Wellington, the blue-chip and extremely private Boston investment partnership. Capital Appreciation I -- which I have in my 401(k) plan -- is run by Wellington veteran Saul Pannell. Its younger sister is divided into five slices, each run independently by a separate sub-manager. Pannell is one. But the biggest slice -- $150 million of the fund's $500 million -- is run by eight-year Wellington manager Michael Carmen.

So where is he putting that money to work? Carmen says that when he's looking for investment ideas, he tries to find what he calls "accelerating tangible operating momentum." That means accelerating revenue growth and widening profit margins.

"There are a couple of sectors I like right now," Carmen says. "One is health care. I'm more excited about large-cap pharma than I have been for a number of years. We're seeing better product portfolios, we're seeing a lessening of patent expirations, and, most importantly, we're seeing a better pipeline of new drugs."

Carmen sees "big opportunities" across the sector. "We think the shares are undervalued in relation to current earning streams and in particular in relation to the pipelines."

He mentions no names, because of Wellington's compliance rules, but the most recent regulatory filings show that drug company Schering-Plough(SGP) is the fund's biggest holding, with just under 2% of assets, and medical devices maker Medtronic(MDT) is second. The fund also has a significant stake in pharmaceutical company Sanofi-Aventis (SNY). However, as the fund is divided into five tranches, there is no way of being certain that Carmen made these investments.

Another investment theme Carmen likes is alternative energy. "Alternative energy is going to be a much bigger piece of the pie over the next few years," he says. Among his favorite ways to play it are companies that make agricultural fertilizers. The are two reasons: There's rising demand for agricultural products to be used for energy. And then there's booming demand for better food, especially protein, from emerging markets. "We like the whole fertilizer food chain," he says.

"When I first started looking at fertilizer-based companies," Carmen recalls, "some people were laughing at me and asking, 'What's a growth manager doing looking at fertilizer companies?' But these trends aren't cyclical -- they're secular."

Meanwhile, Carmen's view on the consumer economy right now isn't quite so cheerful. He's steering clear of discretionary consumer stocks -- the ones that benefit from the extra dollars you have in your wallet or purse after you pay for your home, food and other necessities. "I have been overweight [the sector] historically," he says, "and now I'm underweight. That has been the bedrock of my portfolio for some time."

The reason: the housing slump. "Clearly the last five or six years we've had an amazing tailwind -- very low interest rates, coupled with a very strong housing market," the manager says. "But those tailwinds have become headwinds. You're no longer seeing the benefits from the housing market."

Carmen says his rivals at other firms haven't really woken up to the scale of the change. "I don't think this is well perceived by other growth managers. I don't think they've made that shift."