Kate Stalter: Today we’re talking about growth investing with Dan Morris. He’s the manager of the Manor Growth Fund (MNRGX) and the Manor Fund (MNRMX), as well as president of Morris Capital Advisors.
Dan, let’s start out today with an overview of your investing strategy.
Dan Morris: Sure. Let me just tell you about Morris Capital Advisors very quickly. We are a conservative, growth oriented, investment manager for individuals, institutions, and corporate clients.
We also have two no-load mutual funds that mimic our investment style, so that investors of all sizes can use us.
We take a long-term view, though. We are looking for fundamental opportunities within the marketplace. We like to look for companies that have strong earnings, the capability to grow, a sound financial structure to support that growth, and good cash flow as a result. We invest in companies that we think are attractively priced relative to that valuation.
We hold it in a diversified portfolio with a long-term horizon, to allow opportunities to work, and we think we can generate excellent returns over time with a certain tax-efficient nature to them, as well. So, it’s a strategy that works well for individual investors, as well as institutional-type investors.
Kate Stalter: I was looking at some of the holdings in the fund, and I notice that there seem to be different market caps in there. Is that your overall strategy to be multi-cap, or are you market-cap agnostic?
Dan Morris: We tend to try and keep the market cap in the portfolio in the large-cap space. But in the growth sector right now, you have to look for opportunities where they take you, and since we’re valuation-driven, we look at the opportunities in the market from the bottom up on a monthly basis.
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We look for opportunities where we think the valuation makes sense, and then look at the story. If it happens to take us to a company that is a little smaller then maybe your mega-cap growth company, we’ll go in that direction. We want to take what the market is going to give us.
Kate Stalter: Why don’t you say a little bit about some of the top holdings in the fund, Dan?
Dan Morris: Let me just tell you, we think this is a fairly difficult economic environment to be operating in. Economic growth has not rebounded dramatically from where it was. It has improved, but it certainly doesn’t reflect a strong bounce back from where we were just a few years ago.
So, we think investors have to be very focused on where they’re going to put money. A strategy we’ve used is illustrated, regarding that, in our consumer-discretionary space, where we own Dollar Tree (DLTR) on one side and Coach (COH) on the other.
What we’re doing there, and we entered our Dollar Tree position just a few years ago, where we judged that consumers would move down the scale, and move more to the deep-discount retailers, so we thought that was an area that would get good growth in a tough market environment.
Dollar Tree has an excellent valuation, great earnings, cash flow, it fit our valuation piece, it fit our larger view on where we thought the market and the economy was going, and it’s been a successful position for us.
Coach, on the other hand, is a high-end retailer that has had some great success as well, and there’s a case even in a tough economic environment, consumers will still spend on the up side for something they really think has some value.
The other interesting thing about Coach, which is something we try and keep in mind as well, is that they have generated growth through expansion overseas. So, as consumer activity has grown overseas, there is demand for United States retail products. So, they will have benefited from their foray into foreign markets, as well.
Kate Stalter: One of the things that I had noticed in some of the holdings—as of a few months ago, anyway—you were pretty heavily invested in tech. Is that still the case?
Dan Morris: Well, tech, when you look at the growth space, tech has a fairly high weighting, so you have to have exposure there. We don’t shy away from those opportunities.
But some of the tech holdings, and I’ll give you an example that’s categorized as a tech holding in the portfolio, is MasterCard (MA). We picked that up when we had a great opportunity, when they were taking a look at some of the regulation changes. So, that gave us a buying opportunity in the stock.
It’s in the tech category, but is really driven more by consumer and retail activity. So, that’s a case where yes, while it’s a tech exposure, there’s more to it than just technology.
Kate Stalter: Any other sectors where you’ve been increasing your holdings lately?
Dan Morris: Well, actually, in that tech space a little bit, we’ve actually added a position recently I thought I would tell you about. It’s calledVeriFone (PAY). VeriFone is another payment processor. What we like about VeriFone, in addition to its valuations, it’s got great earnings, cash flow, revenues. Top-line revenues are growing.
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What they do is, they facilitate transactions in mobile and handheld devices. So, we think this is an area that’s going to grow over the next several years. And they have a substantial portion of their revenue generated from overseas right now, and it’s going to grow over the next few years.
I mentioned with Coach that international exposure; it’s really a case where some of these developing economies, the consumer side is really starting to ramp up as their economies grow some, and they have actually grown a little faster than the structural processing part. VeriFone is well positioned in that space to grow over the next few years as they facilitate transaction processing.
Kate Stalter: Dan, what’s your thought on allocating to cash in a weak market? Is that something you really prefer to avoid, or do you go into more cash when the market’s in a downturn?
Dan Morris: By the nature, we are a fully invested investment manager, and the reason we do that is because that’s where clients hire us to manage their money. We do not believe we add value by timing the market, so cash, while it can grow in a tough market where we’re trimming positions and taking gains, we’re looking to reinvest that money back in other opportunities we see.
Since we’re looking at opportunities on a monthly basis, looking for new, attractive valuations that occur in the marketplace, we’re always sort of shopping for opportunities, and we’re really looking to put our cash to work in what we think has an attractive return opportunity.
Kate Stalter: Let me ask you to put on your advisor hat at this point, rather than the fund-manager hat. Let’s talk a little bit about what you’re putting your advisory clients into at this juncture.
Dan Morris: That’s an interesting question, just following the discussion we just had, because I’ll tell you: We get to see investors of all kinds through the advisory firm.
Over the last few years, it has been interesting to see how many more clients have expressed to us that they are “afraid of the stock market.” I even heard that quote over and over again, since I started in the business some 35 years ago, and it was from Depression-era type of investors.
The volatility that we’ve seen, especially the day-to-day and intraday volatility, has really scared a lot of investors. They’re also scared about where the economy is going.
We do two things here, from the advisor side. One is in our stock portfolios, we make sure people understand that we’re looking for opportunities that we think are attractively priced. We’re not just going and buying any type of momentum stock, and that we have a long-term horizon. So, we’re looking to position that money very carefully.
The second thing is, and this is total aside on the advisory firm, is that we have also begun to talk with some people regarding income-oriented portfolios, too. Now, that’s outside of what we’ve generally done, but we feel it’s important to be client-driven when we come and talk to clients out there. They are demanding that more and more.
These are clients who have pulled out of the market in 2008 and 2009, have put their money in CDs, and now see those CDs rolling over at 1%. Or clients that had their funds in a money market fund and earning 25 basis points on it.
So, what we’re really doing is trying to provide a solution to clients who are in that position, that they feel even though they’re not losing money on their portfolio, they’re still falling behind. So, that’s another way that we’ve tried to address the current environment that clients see themselves in. [To address this, Morris started the Manor Bond Fund (MNRBX)—Editor.]
Kate Stalter: If you had any final words of wisdom today for people who are listening to this, who are managing their own investments, what would you suggest to them?
Dan Morris: I would suggest that you approach investing sort of the way we do. Sorry for that shameless pitch there, but you look for opportunities that have attractive valuations first. That’s where we start from. Look for companies who are growing earnings, top-line revenue, have strong cash flow, and solid balance sheets. That’s all very important to us.
We think investors should do the same thing. Too often it’s easy to get caught up in the story stock and make the valuation piece fit. What we say investors should do, and it’s how we approach it, is start with the valuation first, and then look and see if the other factors support that valuation or the valuation opportunity that’s there.
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