You might expect PBHG Funds to have gotten whacked this year.
After all, the funds' adviser,
Pilgrim Baxter, is practically synonymous with aggressive momentum-style investing. Last year, three of its hell-for-leather growth funds cracked the Century Club -- funds with returns exceeding 100%.
But this year -- a bruising one for growth investors -- many of Pilgrim Baxter's funds are holding up. While the flagship
(PBHGX Quote)Growth fund and some other growth offerings have lagged behind its peers, the family has a deeper bench than it's gotten credit for: Seven of its 17 retail funds rank in the top tenth for one-year performance. And four of those seven winners focus on value stocks.
This week's
Meet the Family focuses on PBHG. You probably already knew the firm's propensity for high-octane growth and rapid turnover of its holdings. But you might not have known about the family's solid value performance -- using the term liberally, natch -- or that many of the firm's skippers haven't been at the helm that long.
Chief investment officer Gary Pilgrim says he's not surprised that the value funds, only three years old, have tended to be overlooked. "Traditionally, returns are most spectacular in growth, and the value guys that labor quietly with strong returns just don't get the publicity. Value investing seldom gets really hot, it just gets relatively good."
In keeping with PBHG's overall approach, even the value funds are a little less staid than many of their counterparts. (Check out
TSC's
interview with PBHG value-fund manager Jerome Heppelmann.) While valuations are important, managers also pay close attention to bullish signs like stock buybacks or upward earnings revisions.
Meanwhile, PBHG's tech-heavy growth funds are all in the red for the year to date, like many of their counterparts. But Pilgrim's not easing back on the throttle. "We're relatively indifferent to valuations. If you want to own the best, fastest-growing companies, you've got to be comfortable in a high P/E world," says Pilgrim. The average price-to-earnings multiple of PBHG's 13 growth funds is 46.4.
And have managers pared back on technology? "I'd say, on balance, we've been buyers in the last few weeks," says Pilgrim. Managers are "always moving around to repair damage done by companies that come up short," but Pilgrim Baxter isn't bent on market timing sectors. "It's hard to get in and out of cyclical growth stocks at the right time," says Pilgrim. "When you're looking for the fastest-growing companies, it's hard not to have a tech weighting." Fund managers at PBHG generally employ a bottoms-up stockpicking strategy, honing in on small and mid cap companies with sales and earnings growth rates in the 50% range. Large-cap managers at PBHG set their sights on growth more in the 20% range.
In a sign of just how fast they move in and out of stocks, PBHG managers are generally reluctant to comment on top holdings, since they might be selling them soon (and PBHG's market moves are closely watched by other market observers). The fund family only discloses holdings at quarter-ends, and even that information is likely to quickly become dated.
One longer-term growth pick is
EMC (EMC Quote), which Pilgrim Baxter considers a core holding. EMC has held up well in market turbulence: With a 52-week low of $44 and high of just over $104, it's now trading at around $91.
Greg Chodaczek, an analyst for Large Cap Growth, describes the data storage shop as an "800-pound gorilla." Though some analysts anticipated a drop-off in the need for data storage after Y2K, that hasn't proved to be the case, with a surge in data-intensive files on the web like photos, songs, and even movies. "EMC has a great management team, very focused, and I wouldn't bet again them," says Chodaczek. While EMC is a favorite, he adds that PBHG may occasionally own other data storage plays, such as
Veritas (VRTS Quote),
Brocade (BRCD Quote), and
Network Appliance (NTAP Quote).
Other growth picks include two pharmaceuticals,
Alza (AZA Quote) and
Forest Labs (FRX Quote). "Pharmas have been a safe haven for some of these growth managers moving money out of tech," says Chodaczek. Both holdings also claim strong niche products: Alza markets Concerta, a once-a-day Ritalin drug. Children can take the drug in the morning and skip the lunch-time visit to the nurse's office. "It makes it easier on the parents and on the kids, physically and emotionally," explains Chodaczek. Forest Labs' ace-in-the-hold is Celexa, an anti-depressant drug similar to Prozac. The company's stock price hit a new 52-week high November 29, at $141.31.
PBHG's Family of Funds
|
| Fund | 1-Yr Return | 3-Yr Return | 1-Yr % Rank in Category
(1=Best, 100=Worst) | Manager Start Date |
| (PBHEX Quote)PBHG Select Equity | 11.3 | 36.9 | 34 | 4-24-00 |
| (PBHLX Quote)PBHG Large Cap Growth | 22.6 | 31.0 | 1 | 11-1-99 |
| (PLCPX Quote)PBHG Large Cap 20 | 1.6 | 42.1 | 26 | 11-1-99 |
| (PBSVX Quote)PBHG Small Cap Value | 34.2 | 13.9 | 4 | 6-28-99 |
| (PSSCX Quote)PBHG Strategic Small Co | 23.9 | 17.5 | 8 | 1-2-97 |
| (PBMCX Quote)PBHG Mid-Cap Value | 27.9 | 22.7 | 2 | 6-28-99 |
| (PLCVX Quote)PBHG Large Cap Value | 15.3 | 21.4 | 7 | 6-28-99 |
| (PBLDX Quote)PBHG Limited | 6.6 | 19.9 | 37 | 6-1-98 |
| (PBTCX Quote)PBHG Technology and Communications | -20.8 | 33.2 | 67 | 5-22-98 |
| (PBHGX Quote)PBHG Growth | -1.54 | 14.72 | 68 | 12-19-85 |
| (PBGWX Quote)PBHG Growth Tr | -1.74 | 14.45 | 68 | 8-19-96 |
| (PBCRX Quote)PBHG Core Growth | -7.24 | 17.56 | 79 | 5-28-99 |
| (PBEGX Quote)PBHG Emerging Growth | -11.76 | 3.45 | 88 | 1-1-00 |
| (PBGTX Quote)PBHG Global Tech & Comm | 3-mo. return: -41.6 | N/A | 3-mo. Rank: 68 | 6-1-00 |
| (PBFVX Quote)PBHG Focused Value | 32.5 | N/A | 8 | 6-28-99 |
| (PBNOX Quote)PBHG New Opps -CLOSED | 23.5 | N/A | 13 | 4-10-00 |
| (PBHIX Quote)PBHG Intl | -15.9 | 3.82 | 85 | 7-1-95 |
| Source: Morningstar. Data as of Nov. 30. |
Founded in 1982, Pilgrim Baxter was acquired by
United Asset Management in 1995. The fund family hit a patch of rough performance in the mid-'90s, and investors yanked more than $5 billion out of the funds from 1997 through 1999. Several years ago UAM almost sold Pilgrim Baxter, but the potential acquirer nixed the deal because of the group's problems.
A welcome turnaround sign, parent UAM was acquired this fall by
Old Mutual, a South Africa-based financial services outfit. This year PBHG has regained almost all of the assets it lost, pulling in almost $4.6 billion year to date.
But there are a few caveats for the funds. Several managers have left in the last few years -- all but one of them have been in charge for less than two years. The veteran of the bunch is James Smith, who's headed up the
(PSSCX Quote)Strategic Small Company fund since 1997.
The rest aren't exactly greenhorns; all have experience as either money managers or analysts. But it's worth remembering that the great three-year records of funds like
(PLCPX Quote)Large Cap 20,
(PBMCX Quote)Mid-Cap Value and
(PLCVX Quote)Large Cap Value were racked up in part by folks who've since left.
Fund expenses at PBHG average 1.39, vs. the 1.38 average for all funds.
A potential downside for a few PBHG funds is staggeringly high turnover. PBHG Large Cap Value had turnover over the past year of 1,018%, while
(PBFVX Quote)Focused Value saw an 853% churn. Annual turnover at the average fund is 103%.
Large Cap Value manager Raymond McCaffrey says the funds' small asset bases exaggerated the degree of turnover. Tax efficiency is a better standard to measure, he adds, because some of the turnover came from tax-loss selling to offset capital gains.
According to
Morningstar, the tax-efficiency ratio of the Large Cap Value fund averaged 76.8% over three years, meaning that in the period studied, it lost about 23% of its returns to taxes, which would rank it in the top 2% of funds in its category. (For the first half of that period, the fund had a manager other than McCaffrey). Focused Value isn't old enough to have a three-year record.
Large Cap Value boasts an admirable long-term record and has been one of the top performers at PBHG. Year-to-date, it's gained 18%, helped along by McCaffrey's early call to underweight both technology and basic materials. "As we went into this year, it became pretty apparent that the
Federal Reserve was planning to slow the economy down," he says. "Also, the price of a barrel of oil went from $10 to $25 a barrel. Those two things led us to believe that the economy would be slowing down."
After paring down in economically sensitive sectors last spring, McCaffrey loaded up on food and energy stocks that boasted good fundamentals and cheap valuations. With a weighting in food stocks of around 20%, he says he's not adding to those positions. But he's already done well by names like
Sara Lee(SLE Quote),
Heinz(HZ Quote) and
Kellogg(K Quote), and thinks there's still room on the upside.
The fund group's three other value funds (Small Cap, Mid-Cap, and Focused Value) have all turned in strong year-to-date performances, up from around 16% to 20%.
Top Holdings -- For Now
These stocks turn up in more than one PBHG fund, and make up the biggest holdings in the group's basket.
The funds are known for rapid turnover. |
| Stock | YTD Performance |
| Extreme Networks (EXTR Quote) | 40.1% |
| Polycom (PLCM Quote) | 20.3 |
| VeriSign (VRSN Quote) | -55.5 |
| Juniper Networks (JNPR Quote) | 132.4 |
| Micromuse (MUSE Quote) | 10.7 |
| InfoSpace (INSP Quote) | -78.7 |
| Gemstar-TV Guide Intl (GMST Quote) | -38.1 |
| Ariba (ARBA Quote) | -31.3 |
| Art Tech Group (ARTG Quote) | -55.4 |
| Redback Networks (RBAK Quote) | -16.1 |
| All stocks held in at least two PBHG funds. Data from Marketguide.com as of Dec. 5. Top holdings as of Sept. 30. |
After a stellar year in '99, all PBHG's growth offerings are down. Still, Large Cap Growth ranks in the top 1% of its peers over the last year. Other growth funds in the top decile are
(PBNOX Quote)New Opportunities -- closed to new investments -- and
(PSSCX Quote)Strategic Small Company, a value-growth hybrid.
Meanwhile, PBHG's flagship Growth fund, run by Gary Pilgrim, has had a tough year, trailing its peers by 12% through November. That follows on fantastic returns in 1999, when it nearly cracked the Century Club.
But Pilgrim is no apologist for volatility. "Our growth stock approach is always aggressive, and as a result, always volatile," he says. "It's very hard to get in and out of cyclical growth stocks at the right time. When you get into -- let's call this a bear market, people don't want risk; they don't care how interesting the companies are. They want safety. But we don't change."
