Where Is Saul Pannell's 'Go Anywhere' Approach Leading Him?

A lot of managers can use their fund's mandate -- a tech-sector fund for example, as an excuse for lousy performance. Saul Pannell doesn't have such an excuse. And he doesn't need one, either.

Pannell, manager of the (ITHAX Quote)Hartford Capital Appreciation fund, has a "go anywhere" mandate: He can invest in big companies or small companies, "growth" companies or "value" companies, domestic or international companies. The primary goal: finding stocks that look poised to rise 25% in the next months.

His savvy investing -- aided by his research colleagues at Wellington Management -- has put investors in Hartford Capital Appreciation in good stead. Not only has Pannell managed to pull off the feat of notching positive returns in 1999 and 2000 -- up 66.8% and 8.4%, respectively -- he has also led the fund to a five-year average annual return of 6.2%, putting him in the top 9% of his category (Morningstar officially puts him in the mid-cap growth category, but it's tough to assign a label to Pannell).

Given his winning track record, TSC readers might like to find out where Pannell thinks the market is heading -- and how he's investing accordingly. (Teaser: While he's light tech, he does favor Qualcomm and Cisco.) Read on -- you might just want to follow this skipper wherever he goes.

1. Where do you see the market and the economy heading during the next 12 months, and how is your macro outlook affecting your stock selection?

My investment decisions, while based primarily on company-by-company fundamental analysis, may also be shaped by secular and industry themes. I try to emphasize differences between my outlook and Wall Street consensus, and utilize a broad array of other investment techniques.

Saul Pannell Hartford Capital Appreciation Fund

Tenure: Managed fund since July 22, 1996

Assets: $3.15 billion

Five-Year Average Annual Return: 6.2% (Top 9% of Mid-Cap Growth Peers)

Top Three Holdings: Northrop Grumman Corp. Samsung Electronics ACE Ltd. ADR

Hartford Funds Information: Web Site or 888-843-7824

Sources: Morningstar, Hartford Web site.

I expect that market will eventually reflect the strong likelihood that the recovery in economic activity will not collapse, that interest rates will remain benign and that a war with Iraq would be winnable, but unfortunate. In the near-term, there is a risk that corporate earnings could fail to meet even recently subdued expectations. However, in the intermediate- to long-term I expect that the economy will prove its resilience and that the Fund's opportunistic approach to picking stocks will again reward its investors with satisfactory returns.

2. Your "performance is where your find it" strategy has put fund holders in good stead the past few years, especially in 1999 and 2000. Where are you finding the best opportunities today? What sectors will outperform, in your opinion?

The portfolio is strictly total return-oriented. In seeking high total return, the investment approach seeks maximum capital appreciation from all companies regardless of market capitalization -- smaller company stocks with high earnings growth potential and larger-cap stocks with attractive valuations and catalysts for appreciation.

I continue to be opportunistic and am finding investment opportunities in all areas of the market -- upgrading the portfolio on attractive valuations. As of the end of October, 43% of the fund is invested in stocks over $10 billion in market capitalization and 50% is invested in mid-cap stocks -- $2 billion to $10 billion market cap.

There has been a shift toward higher market-cap stocks during the year, reflecting the compression in P/Es that the market has been seeing this year. As of Oct. 31, large-cap stocks were trading at 14 times projected earnings, mid-caps were 14 times projected and small caps looked expensive at 17 times.

Two areas that I would highlight where I have added to recently are health care and consumer discretionary. Within health care, the sector suffers from the "baby being thrown out with the bath water" syndrome, where the sector is under pressure due to a few stocks.