Mr. Hill: First Investors is a diversified financial network that includes an investment management group, a life insurance company, a sales organization, a transfer agent and a bank under one corporate umbrella. Among the equity funds that we manage in-house are our large-cap fund, value fund, growth & income fund and our mid-cap fund - which is the Opportunity Fund. The Opportunity Fund tends to have a growth orientation to it. It is not a growth fund, and we certainly have invested in compelling value plays. That said, we like stocks that will generate reasonable earnings growth and we look for events that will drive that earnings growth, particularly events that have been overlooked by the sell-side community. Our focus is certainly on mid-cap, but the market caps are often what the markets give us. For example, during the credit bubble, we saw numerous mid-caps leave for the large-cap category. After the credit bubble collapse, we are seeing the direct inverse; we are seeing mid- caps migrate to the small-cap category. Two years ago, we were watching the fund's large-cap weighting. This year, we're watching the small-cap weighting (we rely on Lipper to provide the boundaries that constitute a small-cap, a mid- cap and a large-cap).
TWST: It's been a very difficult 12 months to say the least. How has this
impacted your mid-cap investing and are there still opportunities in that arena?
Mr. Hill: Let's just take the latter one first. We think the opportunities are
tremendous, especially after the March corrections. Mid-caps generally - and
since this is a generalization that means there are plenty of exceptions - are
terrific M&A candidates. That means that at any given moment there tends to be a
small M&A premium built-in for some of the better mid-cap companies. Frequently,
we find mid-caps stocks that trade above the intrinsic value of their cash
flows. That difference may be the built-in premium.
Between September and March, we saw M&A premiums disappear. It created valuation
opportunities that we had rarely seen before. Of course, during this period,
there is some question about impaired earnings power. When a mid-cap shoe
retailer collapses to two or three dollars a share, of course, the first thought
is that - between mortgage payments and declining customer traffic - there may
be a risk of financial distress. In fact, P/E ratios tend to compress quickly to
reflect that kind of risk. But if you do the work to find those stocks that are
going to survive and that should have positive earnings trajectories after 2009,
then there are some great opportunities. We think mid-cap stocks offer some of
the best opportunities.
Your first question then was ÔHow do the past 12-months impact our investment
philosophy?' Historically, the fund is all about stock selection. So we don't
pick sectors, we pick stocks and our sector weights are driven by the results of
our stock selection process. After the recent events of last year, we shifted
that strategy for financials and consumer staples. We still own financial
stocks, and we still do stock selection in financials, but we decided to
underweight on a sector basis. Similarly, we perceived consumer staples as a
defensive source of dividend income. So we increased our weight in consumer
staples. Sector targets are a bit of a departure for us. Once the economy
stabilizes, we may abandon that sector weighting strategy É but it's too early
to tell.
Tickers included in this excerpt: BEZ, FEIC, MTL, RR:LSE, SY
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