The funds most successful picks included Nextel, which was up 62.7% for the year, Boston Scientific, up 19.2%, and UnitedHealth Group, up 23.7%. The fund also had success with Autozone, up 16%, and Alliant Techsystems, up 23.6%. The fund finished 2002 down 13.5%, but was still among the leading performers in a large-growth category that averaged 27.85% in losses, according to Morningstar.
D'Alonzo says the fund stuck to its philosophy of concentrating on individual companies, rather than sectors, in seeking out earnings potential. He cited Nextel in a telecommunications industry that has generally been frightful-as one example of that investing philosophy.
"It's currently the only nationwide wireless provider turning a profit," he says. "We bought Nextel shares in August 2002, based on its cost structure and subscriber growth related to its unique niche within an industry flooded with look-alike products."
The fund bought UnitedHealth Group in February 2001, when price increases were slightly outpacing the growth in medical costs, pointing to margins that were holding or perhaps expanding, he says. The company, meanwhile, was using $1.5 billion per year in free cash flow to reduce debt, buy shares and increase the size of its investment portfolio. As a result, the company beat earnings estimates by an average of about 13% in each of the five quarters it was held by the fund.
Stock picks from previous years also paid dividends for the fund in 2002. Petsmart, bought in June 2001, rang up a 194% gain for the fund when it was sold in October. The company entered the fund's radar screen after it unveiled a detailed turnaround strategy that suppliers confirmed was boosting sales, D'Alonzo says.
Another big gainer was Corinthian Colleges, the for-profit post-secondary education company. The fund started buying the company in September 2001, when research uncovered that more students were signing up for the college's health care-related programs. The fund also discovered students were willing to pay a premium for the courses. The trend continued, as the company beat earnings estimates in each of the next five quarters by an average of more than 17%. The fund sold the stock in December at a 128% gain, D'Alonzo says.
"The best way we can address investor confidence issues is to continue to take our cues from individual company fundamentals, regardless of the overall market," he says. "Hard-to-predict macro trends and headline-grabbing news are beyond our control, so they only affect our investment decisions to the extent that they impact earnings."
But sometimes solid analysis and stock picking wasn't enough. Like other fund managers interviewed, D'Alonzo says some of the heaviest influences on investor attitudes were entirely out of their sphere of influence. "The bad part about 2002 is that the individual company earnings didn't drive stock prices," he says. "The economy, accounting scandals, talk of war and threats of terrorism were among the major macro issues that overshadowed the strides made by various companies."
If there was any good news for mutual funds at the start of 2003, it was the realization that even if the bear market isn't over, the worst of it almost certainly is.