Daniel Becker is candid about the poor performance of the $43-millionMackenzie Universal U.S. Growth Leaders that he has co-managed since August 2003. But he is confident a turnaround is at hand.
"We're investing in premier, large-cap growth companies which have been out of favour to an extraordinary extent compared to small and mid-caps, as well as commodity stocks," says Becker, 40, senior vice-president of Waddell & Reed Inc. in Overland Park, Kansas. At different points in the economic cycle, Becker points out, some stocks will outperform and others will lag. "Coming out of a recession, when interest rates are very low, you want to be in small-caps and mid-cap growth. Once you get into the more mature part of the cycle, which we are just entering, it's better to be in high-quality, large-cap growth."
Launched in January 1995, Mackenzie Universal U.S. Growth Leaders has seen several name and management changes. In August 2003, it acquired its present name after Toronto-based Mackenzie Financial Corp. took over the former Janus American Equity. The fund has also seen significant redemptions, having shrunk from $339.8 million in assets at the end of 2000.
Rated three-star by Morningstar, the fund has been a fourth-quartile performer over the one-, three- and five-year periods ended April 30. Over the last 10 years, though, it ranks in the top quartile, largely because of strong performance during its early years.
In an attempt to put the fund's performance back on track, Becker and his growth-oriented team have focused on so-called "franchise" companies with high margins and high returns.
"We look for dominant companies that are run by visionary management and are shareholder-focused," he says, adding that these companies have sustainable growth rates in the 14% to 20% range.
Becker, who shares management duties with Philip Sanders, limits individual holdings in the 55-name fund to 5%. Turnover was high at 158.8% in 2003 when the fund was overhauled. It was 48% last year, but most of that was due to changes in existing holdings.
"When we get one of these franchise companies," says Becker, "the question we ask ourselves is, 'When is a great company a great stock?' When we think they will be great stocks, we tend to increase their weightings and vice versa."
One example is SLM Corp. (SLM/NYSE), the largest student loan provider in the U.S. Its growth rate has been 15% over the last five years, but Becker expects it will grow at 18% to 20% over the next five.
He notes that the company's margins should increase since it has completed a private sector financing, which was part of a move to unwind the government guarantee. "Its top line will grow a little faster than the industry, since it is taking market share. But its margins will expand going forward." Acquired in August 2003 at US$31, the stock has risen to US$48.35.
A Milwaukee native, Becker attended University of Wisconsin at Madison, where he graduated in 1987 with a bachelor of science in mathematical economics.
His program was aimed at aspiring money managers who spend a year managing a portion of the university's endowment fund. "It turned into a 40-hour-a-week job. You were inundated with material," he recalls.
In 1989, after he graduated from University of Wisconsin with a master of science specializing in finance, investments and banking, Becker was hired as a bank, real estate and transportation sector analyst by Waddell & Reed, which is located in a Kansas City suburb. "I cut my teeth in the S&L [savings and loan] collapse in the early 1990s. You learned to do a lot of due diligence."
In February 1993 he was named assistant portfolio manager. The next year, he assumed responsibility for equity institutional accounts. In 1997, he was named manager of Waddell & Reed Advisors Vanguard. In 2000, he became manager of W&R Large Cap Growth, which is the model for the Mackenzie fund.
Becker says all managers have good years and bad ones. "The key is, when you are good, what is the differential versus the index and peers? And what is the differential when you're bad? Historically, when we're bad, our gap is low. When we're good, it's high," he says.
Now, with interest rates continuing to rise and higher commodity prices exerting pressures on margins, he expects the economy will slow. "We feel confident that our style will prevail, after two years when we knew we were out of favour."
