Richard Aster

Manager, Meridian Growth Fund

Age: 69

Credentials: BA, University of California, Santa Barbara; MA, economics, University of California, Santa Barbara

Experience: Portfolio manager, Meridian Growth (1984-present); portfolio manager, Meridian Value (1994-present); portfolio manager, Meridian Equity Income (2005-present); president, Aster Investment Management Co. (1977-present); securities analyst, Robertson, Coleman, Siebel (1970-1977); analyst, Newburger, Loeb (1968-1970); national bank examiner, U.S. Treasury Department (1966-1968)

Ticker: MERDX

Inception of fund: August 1984

Style: Mid-cap growth

Assets under management: $1.3 billion

Three- and five-year performance as of Aug. 31: 1.68%; 3.28%

Expense ratio: 0.84%

Front load: None

Minimum investment: $1,500

Alpha: 4.88 vs. S&P 500

Evidence that an economic recovery is near is mounting: existing home sales are up, the rate of job losses has slowed and Federal Reserve Chairman Ben Bernanke even uttered the word "recovery" in a recent speech. Encouraging as these signs are, they don't point to a vigorous renewal of economic activity. The economy could grow by about 2% in the next few years, perhaps less, below the 3.4% average rate of the past 80 years, according to the Bureau of Economic Analysis. Does it make sense to seek out growth companies in such an environment?

Yes, says Richard Aster, manager of Larkspur, Calif.-based Meridian Growth fund, which looks for midsize firms that can increase profits by 15% a year or more. In a slow economy, they might be harder to come by. "You take what the market provides, but there are many, many companies that can meet the 15% mark," Aster says.

Meridian has made an art of slow and steady growth investing since opening in 1984. The fund doesn't seek stocks that sizzle, and that can ultimately fizzle too. It often comes down to price. "Just because one company has 35% growth and another has 15%, it doesn't mean that the 35% growth company should automatically be worth more," Aster explains. "You have to look at the quality of the earnings." That's why, when other growth funds soar during boom years, Meridian looks like an also-ran. In hot markets, speculative fare often takes the lead, while firms going along at more tepid growth rates get overlooked.

Take for example 1999, when the fund returned just 13.3% while the average mid-cap growth offering rocketed 60.5%. That landed Meridian in the category's bottom 9%. "I wouldn't pay the price the companies were selling at because I knew they could never grow into their valuations," Aster explains. "Eventually they busted up and we were happy because we could buy them."

But focusing on steady growth has served Meridian and its shareholders extremely well. Most recently, Aster's caution led the fund to a -12.2% return in the past 12 months through Aug. 31, beating 92% of its mid-cap growth competitors according to Morningstar. Over the past three years the fund is up 1.7%, besting 76% of the group.

But now that speculative investing has returned to the market—at least for the time being—Meridian is, once again, finding itself a laggard. Since the beginning of 2009, the fund is up 19.7% in the category's bottom 31%.

CONCENTRATED PORTFOLIO

To compose the portfolio, Aster and his co-manager William Tao start with 100 to 200 potential names that fall in the $500 million to $5 billion market capitalization range. The fund is classified as a mid-cap offering, but the duo now holds 23% of the fund's assets in small-cap names. And while they like the smaller fare, they don't push out stocks that have graduated to large-cap status.

To be included, the company must have the potential to grow its earnings by about 15% for the next couple of years, command a substantial market share, have strong return on capital and a reliable management team. "I like strong balance sheets," Aster says. "I've never liked companies that come with lots of debt. There are some industries where you have to accept it, but if I can avoid leverage on the balance sheet, I will."

There are just 53 names in the portfolio, which Aster says leave him plenty to follow. Throughout the process he and Tao watch the price. "It's something we're always conscious of," Aster says. The right price may not present itself immediately. Sometimes they wait years for a stratospheric valuation to fall back to earth. But patience often pays off.

Case in point: Adobe Systems. Adobe has a strong franchise in web applications and graphic design software; but when the company's price-earnings ratio was more than 40 a decade ago, Aster took a pass. Early this year, though, share prices hit a five-year low, causing Aster to take notice. The maker of Flash and Acrobat has struggled alongside the economy as companies cut back on their tech spending. "They are really tied to the growth of the Internet," Aster says. "Flash technology is used in YouTube videos." Meanwhile, Adobe maintains an ironclad balance sheet with $2.3 billion in cash and negligible debt. Its average return on invested capital has been more than 100% for the last five years.