Fund Focus: Philip Fine of Loomis Sayles Mid-Cap Growth

"Fear colors my sense of risk-taking."

Fund Focus

As shocks from the housing bust still reverberate across the economy, how should investors looking for bold, growing companies avoid getting all shook up? Philip Fine of the $71 million Loomis Sayles Mid-Cap Growth Fund thinks he knows how to keep profits growing in a riskier world: Maintain an exuberant attitude about finding exciting new growth companies, but temper that excitement with a healthy dose of fear. "Fear colors my sense of risk-taking," he says.

The fund's performance in 2007 doesn't give investors much to be afraid of. It gained 39.4 percent versus 5.5 percent for the S&P 500 Index. Over the past three years, the fund has posted an average annual return of 18.9 percent, beating the S&P by 8 percentage points and 20.1 percent over the past five years, 10.4 points better than that index.

Generally, Fine is a bottom-up stock picker. About half of his portfolio consists of what he calls "classic growth stocks." These are shares of companies whose profits are growing at 20 percent a year or more and increasing faster than revenue growth, plus industries with high barriers to entry —"all the stuff that growth managers like to see."

And as a growth guy, Fine is not going to let a pricey valuation turn him away from a promising find. "I'm typically searching for really exciting growth companies; only after that do I figure out if valuation is appropriate.... I'm willing to let a company grow into its valuation. It may not be realistic to assume I can pay a market rate for a premium investment." Accordingly, over the past few years his average price-earnings ratio has been right around 24 or so.

But Fine has a more cautious side as well. He lets his fear inform his decision making when it comes to certain sectors. An example: "It's so easy to get whipsawed trading around energy positions," so he's reduced his weighting in the energy sector. He also has what he calls a "programmatic avoidance" of certain sectors and refuses to buy any stocks in those problem areas. "There are some industries where I say, 'That's a tough way to make money.' No matter what price is, no matter what the street says. I'm just not going to fish there." Companies that specialize in tech areas like disk drives and commodity memory chips are among those that Fine views as losers.

The companies that Fine does like are ones he often has already come to know through experience. He was a small-cap manager in the middle and late 1990s, and, he explains, "we saw a lot of our best small-cap ideas just rocket into the midcap area." One such company is Intuitive Surgical, which Fine describes as the "poster boy" of successful stocks in his portfolio. It manufactures surgical equipment that allows a doctor to operate on you with the help of robotics, instead of lunging at you with a scalpel. Intuitive Surgical reached a breakthrough, Fine said, now that its equipment has become commonplace, allowing it to focus on secondary products such as disposable supplies. "Doctors coming out of medical school are trained on systems provided by Intuitive Surgical," he explains.

Fine's top holdings are medical waste disposal company Stericycle at 3.2 percent of holdings, video game retailer GameStop at 3.1 percent, and financial services company IntercontinentalExchange at 3 percent. Stericycle is a pick that came from Fine's top-down strategizing. "Talk about a good company to own in a recession—they're the dominant franchise in medical waste. You can't think of anything less economically sensitive." The stock's value has doubled in the past two years. Fine says he was somewhat surprised by this growth explosion—he had thrown Stericycle into his portfolio as a "risk modifier" to reduce volatility. Sometimes a little wariness goes a long way.