Quick Take: Investors need to be forward looking, says Mike Balkin, co-manager of William Blair Small Cap Growth/A (WBSAX). Balkin patterns his investment philosophy after the hockey playing of Wayne Gretzky, who he says was known for skating to where the puck will be. Following this strategy, Balkin says his first goal for any potential stock holding is that its earnings are likely to grow at least 15% on a sustainable basis.
While this 15% growth is key, the manager says valuations are also important. "Everything has its price," adds Balkin, who also looks at a stock's price history because the market can overreact in both directions.
While Balkin has succeeded in this year's rally, he's also held up better than most of his peers in recent years without assuming any more risk. This year through September 18, the fund surged 47.1%, while the average small-cap growth fund rose 35.6%. For the three years through last year, the fund gained 11.7%, on average, versus a 17.6% drop for the peer group.
The Full Interview:
S&P: What are the main features of your investment process?
BALKIN: We look for companies that can grow their earnings by 15% or better on a sustainable basis. We focus on superior performance, so we're more likely to pay for companies with this 15% earnings potential rather than chase the next fad. We also like strong management because small companies often depend on the vision of a few key people. This is different from many large companies where the CEO can step down, and the company doesn't miss a beat.
S&P: Do you consider valuations?
BALKIN: We don't believe you can be a growth manager and not pay attention to valuations. Everything has its price, so you have to consider risk-reward. Sometimes great companies don't make great stocks. As a result, we look at stocks relative to their historical valuations, their peers, and the overall market. Companies with the same growth characteristics can trade at very different multiples.
S&P: What's your view of current market psychology?
