Investing According to GARP (With a Twist)
Companies that qualify for inclusion in the Rainier funds fit a distinct profile: they're growing at above-average rates and their stocks sell at discount prices. This strategy is known throughout the fund world as growth at a reasonable price, or GARP.
Rainier practices a GARP strategy, but with a twist: The firm invests across all market sectors and tries to identify the most attractive stocks within each. So, for example, the fund aims to own the energy stocks with the best combination of growth potential and price relative to other energy stocks. "We like the fact that we can find growth in non-traditional places," says Daniel Brewer, one of the Seattle-based firm's six-member investment team.
Rainier judges stocks based on their price-earnings ratio versus the market, their peers and their own histories. "We use this measure as a compass, to steer us in the direction where there's the most opportunity," says Brewer. Rainier also borrows a trick from momentum investors, and buys shares of companies for which analysts have been boosting their earnings estimates.
A standout in Rainier's fund lineup is Large Cap Equity, which was called Core Equity until earlier this year. The $771 million fund (symbol RIMEX), which invests in large companies, gained an annualized 8% over the past decade through June 30, an average of one percentage point per year more than the typical fund that invests in large companies characterized by a blend of growth and value styles.
Deep-water driller Transocean, which is among the five largest holdings in Large Cap Equity fund, is a typical Rainier stock. Transocean (RIG) has benefited from rising oil prices and a worldwide shortage of drilling rigs. (The company announced on July 20 that it will merge with driller GlobalSantaFe.) The stock has jumped 44% over the past year. Brewer thinks Transocean still has room to run, given the oil industry's growing interest in deep-water deposits. "The peak for this company is being pushed out further into the future in terms of earnings," he says. Meanwhile, Brewer adds, the stock's price-earnings ratio is well below historical level. At the July 27 close of $109.90, Transocean trades at 14 times analysts' 2007 earnings estimates of $7.96 a share, and 9.5 times 2008 estimates of $11.58 a share, according to Thomson Financial.
Brewer also likes America Movil, a Mexican wireless operator that is rapidly expanding elsewhere in Latin America. The number of subscribers has grown from 83 million at the end of 2005 to more than 131 million today, making America Movil the fifth-largest wireless operator in the world. The stock (AMX) trades at a modest discount to U.S. wireless operators, Brewer says. At $58.23, the shares trade at 17 times the $3.37 per share analysts expect the company to earn in 2007.
Other top holdings in Rainier Large Cap Equity's portfolio recently included Procter & Gamble (PG), PepsiCo (PEP), and Prudential Financial (PRU). The fund, which requires a minimum of $25,000 to invest, charges a reasonable 1.07% in annual expenses.