S&P picks: Aston/Montag & Caldwell Growth Fund

Aston/Montag & Caldwell Growth Fund Ticker:(MCGFX) ranks as an S&P five-star Domestic Equity fund because of its strong track record, ownership of stocks that S&P Equity Research views on average as undervalued and having financial strength, and because the fund incurs relatively low costs for its shareholders. S&P believes it is important to assess a fund’s underlying holdings in addition to its performance, risk, and cost considerations, and our unique ranking methodology incorporates all of these analyses in establishing our mutual fund ranking.

Given the volatility of the equity markets in the past two years, with the S&P 500 Index up 50% in the one-year period ended March 2010 that came on the heels of a prolonged bear market, S&P Equity Research believes that choosing a mutual fund based solely on a fund’s track record comes with risks. The more insight you have into management’s investment style, how long it has been employed and the costs you are incurring by owning the fund, the more comfortable you will be in making decisions for 2010 and beyond.

This large-cap growth fund’s investment approach, seeking high-quality companies that are growing their near-term earnings faster than the market and trading at a discount to their intrinsic value, has been well executed.

Though March 2010, MCGFX had generated an annualized three-year total return of 2.9% and outperformed its large-cap growth peer average’s loss of 1.7% and the S&P 500 Growth Total Return Index’s loss of 1%. While the fund lagged both in the one-year period, its five-year total return was more impressive, helped by relatively strong gains in 2006, 2007, and 2008. Meanwhile, MCGFX has incurred below-average volatility, with a relatively low standard deviation and beta compared to its peer group.

This team-managed fund is led by Ron Canakaris of Montag & Caldwell and has been in place since the share class inception in 1994. The stability of management helps curtail risk that the fund’s investment approach may have shifted, potentially making the past performance metrics invalid.

Management favors high-quality, large-cap companies with global exposure that have generated above-average dividend growth. However, the market rally that has occurred over the past year has largely been driven by cyclical, often lower-quality, companies, in anticipation of continued macroeconomic improvement, and some blue-chip stocks have lagged. In an interview with S&P Equity Research in early April, Canakaris said that following the strong run, he expects the S&P 500 index could trade “sideways” in the coming months and that high-quality companies would perform better in that environment.

Upon review of Aston/Montag & Caldwell Growth fund’s holdings as of February 2010 (latest available) many of these stocks are viewed favorably by S&P Equity Research. The fund is relatively concentrated with only 32 holdings. Eight of the ten largest positions were ranked by S&P Equity Research as Strong Buy (5-STARS) or Buy (4-STARS); STARS is an independent and qualitative approach to stock selection employed by S&P’s global research team. In addition, as a whole, the portfolio is deemed by S&P as incurring relatively low risk considerations, with most of the portfolio having above-average S&P Quality Rankings, a metric that assesses dividend and earnings growth and consistency.

Abbott Laboratories [Ticker:(ABT) 53 ****], a stock currently ranked as a Buy and with an above-average A Quality Ranking, both from S&P Equity Research, was one of the fund’s largest position earlier this year. In addition to having a strong dividend yield (recently 3.3%), the health-care stock is considered to be undervalued by both fund management and S&P Equity Research.

Hewlett-Packard [Ticker:(HPQ) 54 *****] is another of the fund’s major positions that is also viewed favorably by S&P Equity Research with a current Strong Buy recommendation from S&P. Fund management is confident in the technology company’s ability to deliver above-average earnings growth. Other recent technology holdings (26% of assets in total) included Apple [Ticker:(AAPL) 242 ****] and Qualcomm [Ticker:(QCOM) 42 ****], both S&P buy recommended stocks that have sizable amounts of cash on the balance sheet, a positive trait to fund management.

Outside of traditional growth sectors, the fund recently had a 20% stake in consumer staples stocks, including Coca-Cola [Ticker:(KO) 55 *****] and McDonalds [Ticker:(MCD) 69 ***] that have above-average S&P Quality Rankings of A+ and A, respectively, that management favors because of their earnings growth from emerging markets.

In addition to assessing the stocks in a mutual fund and performance metrics, investors should focus on the cost implications of owning a particular fund. MCGFX has a net expense ratio of 1.1%, lower than its peer average of 1.4%. Meanwhile, the fund has incurred a relatively low turnover rate, recently at 35%. Despite a concentrated portfolio and recently trimming winning positions such as Apple to limit their size in the fund, a focus on high-quality companies keeps trading costs limited. Lastly, the N share class of the fund, open to new investors for only $2,500, has no front-end load.

Overall, Aston/Montag & Caldwell Growth Fund;N earns an S&P five-star ranking due to its strong performance track record, low costs and long management tenure. In addition, the S&P mutual fund raking is supported by the fund’s ownership of stocks that in general are currently viewed attractive and with limited risk.

As with all investments, S&P believes that investors should look to make selections that are suitable for their objectives and risk profiles. To learn more about the S&P fund ranking methodology, click here.

Note: The fund rankings in this article – from five star (best) to one star (worst) – are quantitatively derived from performance, holdings, risk, and expense analysis. The stock rankings, or STARS – using a scale of 5-STARS (strong buy) to 1-STARS (strong sell) – are based on S&P equity analysts’ qualitative and fundamentally-driven outlook for the stock over the next 12 months.

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