Matt Patsky has investors seeing green, and it's not just because the fund he helps oversee is environmentally sensitive and has a colorful name. The Winslow Green Growth Fund finished well ahead of many of its peers during the second quarter, showing a return of 43.9% during the period, versus a 22.2% return for all 482 small-cap growth funds, according to data from Lipper of New York.
After a rapid decline in value during the second and third quarters of last year, when it fell 18% and 24%, respectively, the fund made a significant adjustment to its philosophy, and the change has paid off. The fund's managers started weeding out stocks that are dependent on a strong economy for growth. The fund has decreased its holdings in economically sensitive areas such as the energy sector, while boosting new growth areas in information and services industries, as well as manufacturing - the fund's top three sector holdings. Initially, the share price buoyed a bit during the fourth quarter and declined slightly in the first quarter. However, it took off beginning in March.
Stocks selected for the fund must also meet certain standards of environmental friendliness. This environmental factor provides a further screen, which helps the fund keep loser companies out of the fund, Patsky says. Unlike many other green funds, the Winslow Green Growth Fund uses both positive and negative environmental screens. The firm says the environmental effectiveness is a leading indicator of management quality.
Patsky, a portfolio manager for Winslow Management, the fund's investment advisor, spoke with Money Management Executive Associate Editor Chris Frankie about how the fund has been able to do so well, where the managers have moved the fund's money, the firm's outlook for the economy and working with a socially responsible mandate.
MME: The Winslow Green Growth Fund has had tremendous growth in the last few months and has even been listed as one of the top 10 stock fund performers for the second quarter by The Wall Street Journal. How have you been able to achieve this success?
Patsky: Our focus really has been trying to identify small-cap growth companies that can grow in a no-growth economy. That's one of the principal reasons we've done well. In addition, we have an environmental screen we do, which tries to look for companies that are having a positive impact on the environment and screen out companies that have a negative impact on the environment. I think this combination has led us to a group of fairly solid growth stories with reduced risk.
MME: How much turnover of securities do you have in the portfolio?
Patsky: About 100% a year.
MME: The markets have been gaining momentum since late March, and many are claiming the economy is on the road to recovery. Has your outlook and philosophy changed since the market has apparently turned the corner?
Patsky: We haven't changed our outlook in that we were of the belief that small-cap growth was undervalued. We continue to believe it is undervalued and will outperform the large-cap sector. The economic recovery, if we're in one - and we certainly seem like we're in the beginning of one - looks like it is still going to be slow and apparently sluggish. I also think this will play well to our strategy in that the companies that we're investing in are generally able to grow even if the growth of the economy is sluggish. We're not playing cyclicals.
MME: Have you moved your money now that it appears we are in a recovery?
Patsky: We've increased our exposure to technology, but primarily in software.
MME: Is that because those tend to be the areas of highest potential growth?
Patsky: Right, and they tend to be areas that do well in a turn.
MME: What sector are you most heavily weighted in?
Patsky: Healthcare (see chart).
MME: It would seem that people are always going to need medical attention and products. Can you explain the benefits of investing in healthcare and medical devices companies?
Patsky: That's part of it. What we hold, in general healthcare, tends not to be cyclical. Also, it is benefiting very much from the aging population and the Baby Boomers. We've got increased talk about trying to increase prescription drug coverage for the elderly, and that all plays well to benefiting both the pharmaceutical industry and the medical device industry. So, we've been fairly aggressive in trying to keep our exposure higher in those areas in addition to keeping some exposure in consumer and technology and selected areas.
MME: What indicators or market data do you track, and what is your take on their recent results?
Patsky: I will say this: We do not consider ourselves market timers, and so we tend not to attempt to position ourselves based on economic cycles as much as just picking good small-cap companies. We tend to be very focused stock pickers as opposed to trying to play the economic cycle. So if you are asking me if I pay a lot of attention to consumer confidence, the answer is: No, I don't.
MME: What differentiates your fund's investing style from the hundreds of other small-cap funds?
Patsky: The one aspect of our screening process that we are hearing increasing interest in is doing environmental screens on top of looking at off-balance sheet liability and corporate governance issues. It is becoming increasingly common and something that more and more are doing, which is a positive because it has an impact on shareholder returns.
MME: The fund is environmentally sensitive, but what mandates does your fund have in the socially responsible arena?
Patsky: We are looking for good corporate governance, so we're looking for outsiders on the board of directors. We're looking for a structure to be in place that demonstrates good corporate governance in general.
MME: Before joining Winslow, you were the director of equity research for Adams, Harkness & Hill in Boston, supervising 21 research analysts focused on emerging-growth technology, healthcare and consumer companies. Having come from that background, have you found that managing a socially responsible fund limits the playing field when it comes to selecting investment opportunities?
Patsky: It's not really an issue. It's one more screening tool, and the issues we're screening for gives us an indication of other problems in the management team. When I find a company that has issues around the environment, fines or difficulty complying with environmental regulation, there usually are other issues there at the company. It's really just indicative of a greater problem. You don't want to invest in that kind of company. Environmental problems are usually tied very much to bad management in general. Great management teams tend to have pretty solid programs in place to make sure that they're in compliance with environmental rules.
MME: What is your economic outlook?
Patsky: We think we're in the beginnings of a very slow recovery. It's a sluggish recovery, but it is a recovery.
MME: You said that you expect this to benefit your management philosophy. How so?
Patsky: In looking at periods of economic recovery, and looking at the early stages of economic recovery, the small-cap investing style tends to do well. In addition, you tend to see the smaller companies react quicker to a recovering economy, and they are able to perform better on a relative basis.
MME: What are the fund's total assets under management?
Patsky: We have close to $41 million in the fund and a total of $200 million of assets under management.
MME: What are your main concerns and objectives going forward?
Patsky: We're remaining focused on trying to pick solid companies that we think are going to be able to continue to deliver 15%-plus growth. That's the main focus in the environmental area, and the screens that are laid on top of it are really trying to make sure that we're looking at the environmental impact of the companies' operations.
MME: If there is a slowdown, how would you shift the portfolio and what kind of changes would you need to make?
Patsky: What we've been doing is trying to make sure that we're harvesting some of the companies that have done really well and look for some new opportunities where we haven't yet seen the stocks rise. But there's still room, in most of the key positions we've established, for some of these companies to continue to do well, and the stocks to continue to perform well.
We have to remember that after three years of small caps underperforming the market, valuations got pretty compressed. So I think there's really an opportunity for a fairly long term, several-year run of small caps outperforming large caps. That's what we're in, in terms of the cyclical investment trends. But we think we're positioned well. I don't mean to imply that I don't think other funds will perform well also, but I think small cap in general is a good place to have some money, have some exposure, for investors over the next cycle of the bull market.
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