A Small Growth Fund on a Roll
It's fair to assume that self-proclaimed "aggressive" funds will be a bit on the wild side. With that in mind, Aston/Veredus Aggressive Growth has lived up to its name. But for investors who have held on through the fund's nine-year-long roller-coaster ride, its 30% gain this year may be a reminder of what they liked about it in the first place.
The fund's basic premise is simple enough. Earnings expectations are the main drivers of stock-price movements, says manager Tony Weber, but expectations are often wrong. So, he says, you can make money when you invest in companies that surprise Wall Street with stronger-than-expected earnings growth.
The nine-person Veredus team looks for earnings momentum among companies with market capitalizations of less than $3 billion. They home in on companies that have experienced the most dramatic increases in analyst earnings estimates, or whose earnings have been underestimated by the widest margins, over the past two quarters. The team then forecasts future earnings and considers investing if their estimates are at least 15% greater than Wall Street's.
The fund's performance has been all over the map. In past years, it has outpaced the Russell 2000 Growth index, which tracks the faster-growing companies in the small-company Russell 2000, by almost 70 percentage points and trailed it by as much as 16 points.
Since Veredus Aggressive Growth's inception in mid 1998, it has returned an annualized 13%, beating its benchmark by an average of eight percentage points per year. But the fund owes much of that advantage to its off-the-charts, out-of-the-gate gain of 113% in 1999. Aggressive Growth's worst relative year was 2006, when it lost 2% and lagged the Russell 2000 Growth index by 16 percentage points. Weber says earnings for his picks played out mostly as expected that year, but nonetheless failed to impress Wall Street.
Through October 12, the fund has outpaced 96% of the competition so far this year. Weber thanks the resurgence of growth stocks for that edge, plus strong moves by some of his bets from 2006, such as Intuitive Surgical (symbol ISRG) and Chipotle (CMG).
Because he sees the credit crunch knocking the wind out of the economy, Weber says growth stocks will continue to lead the way over the next 12 months. Investors tend to reward steady growers during periods of economic weakness.
Weber, who has 27% of the fund's $222 million of assets in industrial companies, is particularly high on infrastructure stocks. "The bridge collapse in Minneapolis was proof that our infrastructure is falling apart," he says, "and there are only a handful of companies that can do this work." One beneficiary is engineering firm URS Corporation (URS), the fund's largest holding. The stock has gained more than 40% this year.
Weber also has a big stake -- 31% of assets -- in tech stocks. The demand for video content delivered over the Internet will be a huge driver in that sector, Weber says. He likes companies, such as top-ten holding Ciena (CIEN), that should benefit from increasing demand for bandwidth.
The N-class shares of Veredus Aggressive Growth (VERDX) require a minimum of $2,500 to start. The fund's annual expense ratio is 1.41%.