Eaton Vance's Richardson Likes the Market, Not 'Four-Letter' Stocks

We are very much of the mindset that the job of a manager is risk management. One of the ways you do that is with valuation discipline, which we accomplish at Eaton Vance through our research staff. We have a dozen analysts working with us with an average of 17 years in the business.

We go to additional lengths to avoid unnecessary risk by avoiding overexposure to a particular stock or particular sector. That's generally been a good philosophy to have -- year in, year our, war periods, recessionary periods. Diversification has paid off. There are brief periods when it makes more sense to be very concentrated; we just went through one of those in the late 1990s. You had to adopt a concentrated philosophy and own the largest names in the S&P 500 -- that was the path to outperforming the index. Not surprising, during that period, our fund underperformed the market.

Before and after that period, we have managed to outperform enough that the fund has beaten the S&P 500 by several-hundred basis points [the Eaton Vance Tax-Managed Growth fund ranks in the top 6% of its large-cap growth peers].

What sets the fund apart is that we have achieved that outperformance with a lower risk profile from our peers -- even lower than the market itself. The top 10 holdings have constituted about 15% to 20% of the portfolio. The top 10 stocks in the S&P 500 range from low 20s to as high as mid-30%. The fund's portfolio also has a lower beta and a lower standard deviation than the market. That's a pretty nice equation: higher returns, lower risk.

The final element of risk management in the fund is tax management. I don't know if you saw that Lipper study that came out in the past week or so: "Taxes in the Mutual Fund Industry." It's almost as if we wrote this study. (Laughs.) The findings are interesting, confirming earlier studies that shareholders are giving up over 25% of their returns. I like to demonstrate the benefits of tax management by holding up a quarter -- that's what you lose out of every dollar. We try to manage a fund that lets you keep the quarter. It's weird, I was just estimating, and that's exactly what the Lipper study showed! (Laughs.) We talk about keeping the quarter -- that's a pretty big deal, and it's an even bigger deal in a low-return environment.