Fund Seeks Three Types Of Winners

• Paul Katzeff
• On 6:30 pm EDT, Thursday October 1, 2009

RiverSource Mid Cap Growth Fund looks for the same things as other growth funds: companies with above-average earnings growth, high returns on equity, quality balance sheets and good managers.

How the fund uses what it finds is what distinguishes it from other stock funds.

"What makes us different is that we segregate our names into three buckets," said John Schonberg, manager of the $736.2 million portfolio (NASDAQ:INVPX - News). "The buckets represent diversification of time horizon for us."

Of his total portfolio, 40% go into the bucket for companies that Schonberg calls his secular names. "Those are names we think will work best over three to five years," he said. Those are generally companies in industries that Schonberg thinks will grow faster than the market overall.

That can be due to some theme, such as what Schonberg describes as the convergence of voice, video and data use on the Internet.

Ciena (NasdaqGS:CIEN - News) is an example.

"Ciena is an arms dealer to the Internet's empire builders," Schonberg said. The networking equipment firm supplies gear to phone and cable companies. A key driver is demand for wider-capacity access, so users can download things like video faster.

"The trouble is that a portfolio manager whose holdings don't work for five years won't be kept around to see that happen," Schonberg said. "So we have other buckets with shorter time horizons."

One of those is the fund's cyclical bucket, with 40% of fund assets. "Those are name we expect to hold 12 to 18 months," he said. Those names are in sectors where Schonberg expects faster earnings growth due to economic trends.

That's exactly what Schonberg foresees for dry-bulk shippers. Their catalyst is global economic growth.

Next In Line

"They are the only transportation group that has not moved higher yet," he said. "Truckers moved first. Then rails moved. Then airlines. Now we're focused on dry-bulk shippers."

DryShips (NasdaqGS:DRYS - News) was a top buy in the fund's latest disclosure period. The stock is down 38% this year.

"Stimulus steps around the world are having an impact," Schonberg said. "It will spur more worldwide economic growth."

Rail operator Kansas City Southern (NYSE:KSU - News), up 34% this year, was another top buy.

"KSU moved higher sooner than we expected," Schonberg said. "We still hold the name but are willing to take profits when stocks move ahead of expectations. The shippers have not moved up ahead of expectations."

The final 20% of fund assets is in a tactical bucket. Schonberg expects these stocks to show gains within six months.

"This mix of time horizons allows us to perform in different types of markets," Schonberg said.

This approach has led the fund to a 63.60% gain this year, going into Thursday. Its midcap growth rivals tracked by Morningstar averaged a 31.56% gain. The S&P 500 was up 19.26%.

Over the past three years, the fund's average annual gain was 3.17%, vs. a 2.94% average loss for its peers and a 5.43% average annual loss for the S&P 500.

Schonberg's team includes associate managers Mike Marzolf and Sam Murphy.

Tibco Software's (NasdaqGS:TIBX - News) return on equity has climbed for three years. After starting a pullback on Aug. 11, it found support at its 10-week moving average. Now trading near 10, it has almost tripled off its 3.45 low on Nov. 21.

The company makes middleware -- business application and database integration software. "Some papers began to report rumors that they would combine with SAP (NYSE:SAP - News)," Schonberg said. "Whether that proves true or not, it would make sense for both companies. Tibco is the last stand-alone in its space. They won't be for long."

Buzz up!