Fund Focus: Turner Emerging Growth Fund

Manager looks for fast-growers wherever he can find them.

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Many investors try to model their style after big names like Warren Buffett. The closest model for Frank Sustersic, manager of the $674 million Turner Emerging Growth Fund, might be Mister Spock. "As an investor, I try to stay as unemotional or objective as possible. I don't have allegiance to any sector," he says.

His detached attitude appears to have put Turner Emerging Growth above its peers. Each of the past five years it has shown better-than-average growth compared with other funds in its category of small-cap growth funds, as tracked by Morningstar, including a 6.1 percent edge this year. The fund is up 17.2 percent so far this year, which is 9.0 percent better than the S&P 500. Over the past five years, it's posted an average annual return of 21.7 percent.

So how does one pick stocks without emotion? Sustersic, who has managed the fund since 1998, says that what matters most to him in a company is "organic growth." As he explains it, there are a lot of ways that the reported growth rate of a company can be inflated by factors that aren't sustainable. His example: A company is in an industry that's growing at 5 percent, but through a series of acquisitions of smaller companies it could appear the firm is growing at 20 percent. "You don't want to assign too high of a valuation to a company whose organic growth rate is much lower than its reported growth rate." Sustersic looks for companies where earnings are growing at 15 to 20 percent a year.

Double-digit revenue growth is what first catches Sustersic's eye. Then, he makes sure that this growth is actually sustainable by looking at how it fills a specific niche. For example, one niche that he likes right now is clinical research organizations. These companies are hired by pharmaceutical and biotech firms to run clinical trials and collect data. He thinks this is a high-growth area now because of changes in the pharmaceutical industry toward more outsourcing. "A shift from a major pharma company to go from 20 to 30 percent outsourcing—that's a huge shift." Some clinical research organizations that he likes are Kendle International, ICON, and PharmaNet Development Group. Healthcare is the biggest sector he invests in at 16.14 percent of his portfolio. (Energy is the second-largest at 12.46 percent.)

Sustersic also says that talking and meeting with the management is important to him to figure out the real story behind what may look like phenomenal growth on paper. "Recent results might look attractive, but you talk to the CEO and you discover about a new competitor gaining market share or the economic slowdown is hurting them."

There are about 100 stocks in the fund, and his turnover rate this year has been about 60 percent. The fund's top holding at 2.87 percent of assets is Deckers Outdoor Corp., which makes fashionable outdoor footwear such as Ugg boots and Teva sandals. Agricultural company Terra Industries is Sustersic's second-biggest holding right now at 2.24 percent. Before he bought the stock in December 2006, Sustersic saw the increased demand for corn because of an increased use in corn-based ethanol. Since corn requires more nitrogen-based fertilizer than most other crops, Sustersic thought 2007 would be a big year for Terra, which produces those nitrogen products. Indeed, shares of Terra more than tripled.

When deciding whether or not to sell a stock, Sustersic looks at key growth drivers for its industry. In retail, for example, he looks at same-store sales growth, square footage expansion, unit growth, and stability of margins. If the company isn't performing as expected on a few of these key criteria—for example, "if they were going open 30 stores and they can't open as many," he says—then the company might get the boot. "If a company is not executing, sometimes the best thing to do is admit a mistake."


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