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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Thursday, June 30, 2016


“It’s a very simple process,” says Brian Berghuis , portfolio manager at T. Rowe Price in Baltimore, Maryland, and lead manager of the TD U.S. Mid-Cap Growth Fund, in speaking about the stock selection process that has seen the fund maintain top-tier performance since its inception in 1993: Most recently, 3-, 5-, and 10-year average annual compound returns through the end of May of 21.0%, 16.8%, and 10.3% respectively. And that performance yielded a monthly FundGrade™ A-grade and the annual FundGrade A+™ Award for 2015.

“We’re definitely bottom-up investors, and we rely very much on our internal research capabilities at T. Rowe Price,” Berghuis adds. “We buy good companies, and then we hold on to them for many years. It’s 97% bottom-up stock-picking, with a 3% overlay – if we see a group that’s tremendously out of favor, we’ll look at those companies. Or if a group is way overvalued, we’ll trim down our holdings.”

As for the process itself, Berghuis says they look for four key elements in assessing suitable companies (the fund’s “mid-cap” designation ranges from US$3 billion to US$30 billion in market capitalization, although Berghuis focuses mainly on the lower end of that range).

Good management is paramount

“The first critical element is a good management team,” says Berghuis. “We always meet with management before we invest in a company, and we meet again at least once every year, so we can understand where they’re coming from and where they’re going. [T. Rowe Price vice-president and equity portfolio manager] John Wakeman and I have met with management teams thousands and thousands of times over the years.” (Berghuis has 31 years’ experience at T.Rowe Price, while Wakeman has 27 years.)

“The second criterion is a good business model,” Berghuis continues. “Whether they have low production costs, patent protection, or a brand name, it leads to strong returns on invested capital.

“The third thing we look at is the balance sheet and cash flow statement,” says Berghuis. “Of course, not every company is going to have a pristine balance sheet, but we put a lot of emphasis on this. A former manager once told me that balance sheets don’t matter 90% of the time, but when they do matter, they’re the only things that matter.

A risk-aware approach

“Finally, while we are growth managers, we take a risk-aware approach in looking at valuations,” says Berghuis. “If it’s overvalued, then we trim or sell it. And we maintain a disciplined process – that’s important in this business. Sometimes our approach goes out of favor, but you need to stick to it and have faith in the process. If you start changing your stripes, it leads to terrible results.”


Berghuis adds that the fund’s long-term perspective and low turnover has advantages. “We use a long time horizon – and we actually do it – whereas Wall Street has a very short-term focus. For example, they’ll look for same-store sales growth year-over-year, and if it’s 3% rather than 4%, they pull back. We look a few years down the road, because that 3% could become 15% or 20%.”

The selection process has led to a portfolio filled with mainly unfamiliar (to Canadians) names such as Fiserv Inc. (NASDAQ: FISD), Carmax Inc. (NYSE: KMX), and Teleflex Inc. (NYSE: TFX). But oddly enough, the fund’s second-biggest current holding is London, England-based Wills Towers Watson PLC (NASDAQ: WLTW) – a legacy position resulting from a Transatlantic merger. But despite the location, Berghuis isn’t daunted by Brexit.

Brexit not a disaster for the U.K.

“It’s certainly been painful these last couple of months, but there’s still a possibility that it won’t happen, and in any event, it doesn’t have to be the end of the world,” says Berghuis. “There are compromises to be had. If you look at Canada and the U.S., we don’t have a common currency, but we get along well, and we have a very close trading relationship. If Britain leaves [the European Union], I don’t see it being a disaster for them. Britain brings a lot more to the relationship than the EU brings to Britain.”

And so, WTW as well as Bethesda, MD-based hotel operator Marriott International Inc. (NASDAQ: MAR) – another firm with extensive European exposure – remain in the fold. “Marriott was hit hard [in the immediate aftermath of Brexit], but they still look very attractive,” says Berghuis. “They’re not cyclical – they don’t own real estate – and their valuations now are quite compelling.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2016 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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