Yeager points to three criteria that form the basis of the fund's entire bottom-up stock selections: pricing flexibility, recurring revenue streams and global reach.
When he says pricing flexibility, Yeager indirectly is saying that he doesn't want any part of a company that is vulnerable to a good old-fashioned price war. Speaking the day after Intel Corp.-a mainstay of many large-cap growth funds-announced a 50% slash in Pentium computer-chip prices, in what was viewed as a move directed at arch competitor AMD, Yeager borrows an analogy he says he got from Buffett. "We're looking for companies with moats-an impregnable market position in some facet of their business."
It is that moat, he says, that provides a company with sustainable growth and forward-looking growth potential. So what's a moat in real-life terms?
Yeager points to Wm. Wrigley Jr. Co., which the fund bought about four years ago. The company basically has only one product: gum. That's not exactly a high-growth product. But, Yeager says, Wrigley's has a moat. "They have no global competition," he says. That fact, along with the Wrigley brand name, gives the company pricing muscle and prospects for good steady growth. "That's why we prefer bubble gum over computer chips," he says. "What you have is a well-protected revenue stream in a slow-growth economy."
Even when there is competition, a strong brand name by itself can give a company the pricing protection it needs, he says. He cites Gillette's ability to roll out higher-priced premium batteries when a competitor gets aggressive with pricing. And Starbucks Corp. landed on the fund's holding list after Yeager became convinced customers happily pay a premium for coffee if the Starbucks name is attached.
Not only does customer loyalty strengthen earnings prospects, but it also lays a foundation for introducing new products, Yeager says. "On top of those recurring revenue streams, these companies can introduce new products," he says.
In the case of Starbucks, the company has started selling sandwiches, sweets and supermarket products, including the nation's best-selling brand of coffee-flavored ice cream, Yeager says. "Our older clients don't understand why we're invested in Starbucks. But their children do," he says.
Though the past year has challenged many large-capitalization growth funds, the U.S. Global Leaders Growth managed to dodge a lot of bullets, partly because it bailed out of technology. For the 12 months ending March 15, Lipper Inc. ranked it as the top-performing large-cap growth fund out of 501 such funds. A large weighting in such health-care and drug stocks as Abbott Laboratories, Johnson & Johnson, Merck and Pfizer played a key role in the fund's recent performance.
There are times when the moat is more of a mirage. AT&T Corp., for example, was a company that fit the fund's investing scheme in just about every way back in 1999. The power of the company's brand name was indisputable. Its global growth potential was bright. And it still was the far-and-away frontrunner in long-distance telephone revenues.
Yeager bought the company that year, largely on AT&T's plan to unite long-distance, local telephone, cable-television and wireless-phone services into one service package with one bill. With the AT&T name, it seemed like a plan that couldn't miss. Except the plan was never implemented, and the company has since foundered. The fund sold AT&T several months after buying it.