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) 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.

I am finding good opportunities among some of the well-positioned pharmaceutical stocks, as well as among health-care services stocks that have recently come under pressure due to a combination of sector rotation, resulting from profit-taking and rising health-care costs. Within consumer discretionary, I like media stocks on the belief that these stocks are attractively valued today and will participate in economic recovery, as companies once again begin to spend on advertising.

3. You have mentioned that you look in growth and value, with an eye on making 25% or more over the next 12 months. How do you assess a company's prospects in this difficult environment? What key measurements do you apply?

In general, I have a value bias, but I will buy both growth and value stocks seeking to invest in companies that are obscure and controversial. Valuations matter to me; I am not a momentum investor and will only invest in those companies where the business models, fundamentals, management teams and valuations make sense. It is difficult to place one set of criteria on all companies.

Some of the factors I look at are free cash flow, the health of the balance sheet and meeting the management teams of every company I invest in to ensure that I am comfortable with their ability to steer the company in the future. In addition to conducting my own research, I leverage the resources of Wellington Management's central research department, seeking input from the analyst covering the stock to gain further insight.

4. Can you provide a good example of a value play in your fund and a good example of a growth play, and elaborate a bit on the prospects of both stocks?

An example of a value play in the Fund is Samsung Electronics, which is a manufacturer of DRAM memory chips, cell phones, flat panel displays and other enabling technologies.

As Samsung becomes increasingly recognized as a consumer electronics company, we expect its valuation multiple to expand. Samsung currently trades at only eight times earnings with solid historical profitability and a relatively strong balance sheet.

An example of a growth play is Nextel Communications ( NXTL), which is a provider of wireless communication services.

Nextel is exhibiting greater growth and lower subscriber "churn" then the other nationwide wireless providers. Nextel's service offering is differentiated by its "direct connect" walkie-talkie feature, which has gained traction in the business and government customer channels. Nextel's increasing exposure to the government channel makes it a beneficiary of recent homeland-security legislation.

Pannell's Progress
Under Saul Pannell, Hartford Capital Appreciation has outpaced the S&P 500 in each of the past six years, except 1998. Included is the fund's percentage rank among peers. (1%=best; 100%=worst)
Source: Morningstar.

5. Nextel, a new holding as of your most recent statement, has run up 400% since early July. Does this stock still have room to grow?

I would rather not talk in depth about specific stocks, but I will comment on the telecommunication services industry as a whole. While I continue to think that this industry will take more time to work off some of the excesses that it built up during the "bubble era," there will be some consolidations that should help this process. There are good investment opportunities within this sector.

I do still own Nextel and continue to believe that they have good next-generation products and will have good pricing power as we continue to move closer to capacity.

6. You smartly lightened up on the Qualcomms of the world by second-quarter 2000. According to your statement at the end of the second quarter, your fund was fairly light technology. Does technology still look overvalued to you? If so, was the 32% gain in the Nasdaq a fool's rally?

As of the end of October, the Fund had a 13% position in technology, slightly underweight its custom benchmark. Exposure to this sector is both within outsourcing companies, an area that is running at 50% capacity and is expected to benefit from the recovery in the economy and through select hardware and equipment stocks.

While I believe that some technology stocks still trade at significant multiples, I invest one stock at a time, not sector by sector. I do still own Qualcomm ( QCOM) within the Hartford Capital Appreciation Fund and believe that once the 3G transition gains traction, this company will benefit.

I wouldn't say that the 32% gain in the Nasdaq was a fool's rally, but I do think that investor expectations still need to be revised downward in order for a sustainable rally to take hold.

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7. Another tech stock you own is Cisco. While Chambers & Co. has positioned the company well to improve during this downturn ($21 billion in cash helps), why is the stock a good buy now if information-technology spending looks so feeble and near-term growth doesn't look too promising?

The IT spending environment is very weak, and competition throughout the industry is intense. The software market is overbought, with lots of "shelfware" remaining. Typically, the third quarter is weak for software companies as summer limits deal-closing opportunities in Europe and the U.S. The impetus for improved IT spending will be improved corporate profits and an improving U.S. economy; nonetheless we do not expect a robust recovery.

With respect to Cisco ( CSCO), I continue to think that the company is well managed and remains one of the most defensive names among its competitors.

8. Hartford's Web site mentions that your fund subscribes to the WIDGO philosophy: When In Doubt, Get Out. Tell me about that sell discipline and how it has helped you avoid some big blowups of the past few years?

I will sell a stock when the price target is met or the upside is less than 25%, when the story changes or when I find a more attractive investment idea.

When I purchase a security, there is a "script" of how I think the company will fundamentally perform relative to its industry and competitors. At the first sign I have miscalculated the future course of events, I "get out."

Recently, I owned a position in Petrol Brasil, one of the largest oil companies in the world. On the basis of a number of valuation criteria, Petro Brazil is an undervalued relative to its other integrated oil peers. That said, as the political and economic environment in Brazil began to unfold beyond my expectations this past summer, I closed our position at levels higher than today's price.

Another recent example is Credit Suisse Group ( CSR), which is a global financial services company. On a sum-of-the-parts basis, this company was worth significantly more than its market value. However, I did not anticipate the company's announcement of inadequate reserves within its insurance business. I again sold the position at level's above today's price.

9. Your fund holds some companies that have "headline risks" associated with them, namely Tyco, Citigroup and AOL. Can you speak generally about how you approach "red flag" companies, and specifically about these stocks -- which, according to Morningstar, you have been adding.

I sell stocks when things unfold beyond my expectations.

With respect to AOL Time Warner ( AOL), Citigroup ( C) and Tyco ( TYC), I continue to believe that these stocks are attractively valued and have good underlying business models.

10. You were Wellington Management's defense-industry analyst for 15 years. What are your thoughts on that sector, and why is Northrop Grumman your top holding as opposed to, say, General Dynamics?

I started adding to the defense sector in early 2001 and, given the president's commitment to fighting terrorism, spending should continue to increase. Today, I believe that this is a market of stocks, not a stock market.

Northrop Grumman ( NOC) was the largest holding in the fund (as of Oct. 31) and continues to be well-positioned. I believe that the hangover of the TRW acquisition and the distribution of the auto franchise are coming to a resolution, which should result in a price "pop."

Overall, I believe that many growth-oriented managers are hiding in defense stocks, although many have started to exit recently. The defense sector, in my opinion, still has solid fundamental trends, and with the trifecta of Republican power, defense spending should grow modestly and remain stable.

Having said that, I have reduced my exposure to defense stocks as the valuations have increased and have deployed those profits in other more attractively valued stocks, some areas that we have talked about already.