(Re)Opened for Business

How do you go about picking stocks?

Pohl & Cameron: We are strictly bottom-up, fundamental analysis kind of folks. We're out there reading the SEC documents and all other public documents; we subscribe to a lot of trade journals; we spend a lot of time not only visiting company management, but also their competitors, and we hire consultants to advise us on technological and legal aspects of companies. Overall, we are trying to develop a deep understanding of a company's prospects on a long-term value basis. We focus on the underlying financial condition and prospects of individual companies, including future earnings, cash flow, and dividends, because we want to get a fundamental understanding of what a company is doing with its money. We also look at financial strength, economic condition, competitive advantage, quality of the business franchise, and the reputation, experience, and competence of a company's management. [Those are all] weighed against valuation in selecting individual securities.

How long do you typically hold onto a stock?

Gunn: We say that we invest on a three-to-five year basis, but on average, we generally hold a company for about seven years. That said, we could own something for six months or even 20 years, but we are always looking for a long-term approach as we want to get the long-term value of companies.

What does the fund look like right now in terms of holdings?

Pohl: We are basically overweight in three areas: Technology, media, and healthcare. On the technology front, we're in a wide array of stocks that have a low market-cap to sales ratio, which means they have fairly low margins or revenue growth. But all the same, we still believe that we are in an interesting time with companies like Hewlett-Packard, Sony, and Motorola, and we look at them on a four-to-five year time horizon because we think their prospects are excellent. Media companies like Comcast, Time Warner, and Newscorp represent about 12% of our portfolio and we have a growing position in pharmaceuticals and healthcare service companies. We think they are at historically low valuations in terms of market cap over the next 20 years.

What new areas are you looking at?

Gunn: Through this turmoil, we have been adding into the financial sector, so we are perhaps slightly overweight that sector now. We do believe, though, that over the next five to 10 years, global growth will be led by developing economies. The current economic estimate for developing-world growth is 7%, compared to only 1% to 2% for the developed world, so we are seeing a lot of opportunities in developing economies. Other things being equal, therefore, whether [stocks] are in our domestic portfolio or our international portfolio, we are seeking to be exposed to the growth in the developing world. Dodge and Cox is launching a new global fund, only our fifth mutual fund since 1932, where we can emphasize both U.S. and foreign stocks. Many times we look at companies like HP and Motorola, or AIG (which has a great deal of exposure to the Asian insurance market), companies that have a lot of positions overseas, and we want to take advantage of that, so we are proceeding quite rapidly with what's happening in the developing world.

What would you say is the one trait that sets you apart from your peers?

Pohl: A key characteristic is that we have a lot of staying power. We have done our homework, we have done our analysis, and even in markets like this, we are likely to buy more because we don't get scared out of our positions easily. We really are "stay the course" players. We saw that in 1998 and 1999, when we underperformed at the tail end of the tech bubble, but by the end of 1999, we had sold out of our tech holdings. So we are extremely disciplined investors and we are always focused on creating lasting value through a disciplined investment approach.

Savita Iyer-Ahrestani is a seasoned financial writer and regularly contributes to Investment Advisor from her home in the Netherlands. She can be reached at [email protected].