According the latest prospectus, by the end of 2008, his Meridian Growth Fund returned 11.34% per year from August 1984, Value fund returned 12.53% per year since February 1994. The prospectus does not include performance for the year of 2009, the firm really could do a better job in update their publication. But they really do have a good long term strategy. In the year ended on March 31, 2010, Growth Fund returned 49.39%, Value Fund returned 46.42%, and Equity Income returned 55.35%. So short-term, the fund is doing OK too.
Meridian Fund website features three The Wall Street Transcript interviews:
I found the two James England interviews more worthy reading. James England helps Richard Aster manage the value fund. In the 2006 interview, James England discussed the investment process and valuation metrics:
Our ideal holding is a temporarily broken growth company that operates in an attractive and growing industry and has a leading and defensible market position. We like a solid balance sheet, good management and the potential for strong returns on capital and free cash flow generation. A reasonable valuation is important. It’s difficult to find companies that meet all of these criteria. No company is a perfect fit. We avoid companies that, in our opinion, are in a secular decline. We don’t invest in any companies that, by our analysis, can’t grow earnings for at least two years.
Price to normalized earnings is our main valuation criterion. We try to determine what we believe a company can earn in three to five years once the problems are fixed. We compare this earnings level to the current price. Free cash flow yield is another important measure for us. We look at all valuation parameters, but these are the top two.
To find investment candidates, we run screens for companies that are having problems. We identify the ones that, in our view, have strong financial characteristics and will resume growth. We read the financial statements, follow any news, listen to conference calls, talk to management, and meet with the management in most cases. Sometimes the decision is easy, but more often we monitor companies for several months and sometimes years before investing. Our research team may monitor over 100 companies at any given time.
Talking about the fund’s investment process and valuation metrics in2008, James England says:
Firsthand research is important. Once we identify companies that fit our strategy, we will examine the financial statements, listen to conference calls, attend company conference presentations and meet with management, or at least speak with management. We have talked with management on all our investments and, in most cases, met with them personally. An important metric for us is return on equity or capital. A consistent return on equity is usually the sign of a well-positioned company and a good business. Our primary valuation metric is price to normalized earnings. We determine what we believe the company can earn once their problems are resolved. The companies we research have earnings that are depressed. Normalized earnings, after business conditions have improved, are a more meaningful indicator of price appreciation than price to current earnings. Strong free cash flow and a solid or improving balance sheet is also important.
Aster also discussed the decision-making process with the Growth Fund:
Again, we are focused on growth stocks. We look for several characteristics. First, we want a company that addresses a market that is conducive to growth. They may have new technology, a new product or are able to take share in a large market, such as the retail area. Second, the company must have an important market share. This can be looked at in different ways, but market leaders have many advantages in terms of their cost structure, access to capital, marketing, etc. Small players, sooner or later, run into difficulty. Third, a successful growth company must have a high return on invested capital. You need to finance the growth, primarily with internally generated funds. A 10% return on invested capital won’t support a 15% growth rate. Finally, a good management team is critical to long-term success. This may be difficult to determine initially. It’s an on-going process. We do our research and then monitor developments. Is management bringing in good people at all levels, not just at the top? Are they building their capital base and infrastructure to support the growth? Once we find a company that, in our opinion, meets the above criteria, we then turn to valuation. What price can we pay and expect to get a decent return?Even for the Growth Fund, valuation is very important, Aster think it is one areas that distinguish his firm from some other Growth Fund:
There are no specific metrics (to valuate companie) that consistently work, but valuation is critical. The focus on valuation, I believe, distinguishes the Meridian Growth Fund. Many growth fund managers find a company they like and buy it, irrespective of valuation. We find a company with good long-term prospects and then determine what price we can pay and still expect to get a good return, considering the risk. Those investors that don’t pay attention to valuation, sooner or later will regret it. This happened in the late 1990s with the tech bubble. Many of the aggressive funds that performed well in the late 1990s were down anywhere from 50% to 80% between 2000 and 2002. We had positive returns in the late 1990s but underperformed our more aggressive peers. We then outperformed by a wide margin in subsequent years. Valuation is an important component to successful investing.
There are no hard and fast rules for valuing a company. We know all the numbers and ratios, as does everyone else. This is the scientific part of the valuation process. Then it becomes more of an art. I rely, in the final analysis, on gut feel and instincts. Certain companies may be growing slower but deserve a better valuation for several reasons. The growth is sustainable, the returns are higher and the business is defensible well into the future. It’s difficult to explain until you get to specific companies.
Each of the three funds obviously has different tilt in investing, but they all most likely to invest in mid-cap stocks than in large- and small-cap stocks. The funds’ managers it is easier for a $5 billion company to grow to $10 billion than for a $50 billion company to grow to $100 billion.
The three funds are relatively diversified, holding 50-60 stocks each. Not extremely diversified but not overly diversified either. GuruFocus tracks stocks of Meridian Fund’s three funds in one under “Richard Aster Jr”. As of March 31, 2010, his firm held 151 stocks and there is $2.43 billion in equity portfolio.
As of March 31, 2010, his asset allocation is as follows:
These are the top purchases of Richard Aster in 1Q2010:
No. 1: Acxiom Corp. (ACXM), Buy: 0.61% of the portfolio - Total: 831,600 Shares
Acxiom Corporation integrates data, services and technology to create and deliver customer and information management solutions for many of the largest, most respected companies in the world. Acxiom Corp. has a market cap of $1.54 billion; its shares were traded at around $19.45 with a P/E ratio of 32.4 and P/S ratio of 1.1. Acxiom Corp. had an annual average earning growth of 3.6% over the past 10 years.
Richard Aster bought this new position in 1Q10.
No. 2: Citrix Systems Inc. (CTXS), Add: 0.82% of the portfolio - Total: 948,690 Shares
Citrix Systems, Inc. is one of the suppliers of application delivery and management software and services that enable the effective and efficient enterprise-wide deployment and management of applications. Citrix Systems Inc. has a market cap of $8.76 billion; its shares were traded at around $47.64 with a P/E ratio of 32 and P/S ratio of 5.5. Citrix Systems Inc. had an annual average earning growth of 4.2% over the past 10 years.
Richard Aster bought 410, 000 shares of CTXS in 1Q10.
No. 3: Equifax Inc. (EFX), Buy: 0.6% of the portfolio - Total: 405,700 Shares
Equifax is one of the leaders in facilitating and securing commerce by bringing buyers and sellers together world-wide through information, transaction processing and Internet businesses. Equifax Inc. has a market cap of $4.2 billion; its shares were traded at around $33.24 with a P/E ratio of 14.4 and P/S ratio of 2.3. The dividend yield of Equifax Inc. stocks is 0.5%. Equifax Inc. had an annual average earning growth of 7.5% over the past 10 years.
Richard Aster bought this new position in 1Q10.
No. 4: Edwards Lifesciences Corp. (EW), Add: 0.63% of the portfolio - Total: 328,502 Shares
Edwards Lifesciences Corp. a leader in advanced cardiovascular disease treatments, is the number-one heart valve company in the world and the global leader in acute hemodynamic monitoring. Edwards Lifesciences Corp. has a market cap of $5.74 billion; its shares were traded at around $101.48 with a P/E ratio of 32 and P/S ratio of 4.4. Edwards Lifesciences Corp. had an annual average earning growth of 9.6% over the past 10 years. GuruFocus rated Edwards Lifesciences Corp. the business predictability rank of 5-star.
No. 5: The Stanley Works (SWK), Add: 0.73% of the portfolio - Total: 317,840 Shares
Stanley Black & Decker, Inc., formerly known as Stanley Works Inc. The Stanley Works has a market cap of $5.05 billion; its shares were traded at around $62.61 with a P/E ratio of 21.5 and P/S ratio of 1.3. The dividend yield of The Stanley Works stocks is 2.2%. The Stanley Works had an annual average earning growth of 2.7% over the past 10 years.
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