He didn’t. After all, his family is active in their church group, and he attends Mass four to five times a week. “I was born and raised Catholic. I am pro-life and pro-family values,” he says.
He’s also a stickler for investing in companies that have the potential for above-average earnings growth and sound balance sheets. They must have a sustainable competitive advantage, such as a patent or scalable product or service, and a leading position in their respective markets. Valuation is also important, which is one reason the fund sometimes establishes a position after negative news about a company or industry brings a stock down. Milligan also likes to see a strong capital structure at a company that will allow it to weather tough times—a characteristic he learned to identify after working as a corporate fixed-income analyst at Standard & Poor’s for four years.
Stocks typically stay in his fund for several years; its annualized portfolio turnover has ranged from 29% to 33% for the three years beginning in January 2016. He may decide to sell a stock, however, when its price moves beyond the estimate of the company’s intrinsic value, when the company’s financial results are disappointing or when the company violates the fund’s religious screens. The portfolio is concentrated in 35 to 40 names, and because the top 10 holdings account for 40% to 50% of assets, they have a strong hand in its performance.
Milligan says the Ave Maria Growth Fund is more price-sensitive than many growth funds. “But under the right circumstances, we are more willing to pay for higher quality companies,” he says. “That’s especially important in a rising rate environment, when [a company’s] quality and [its] ability to grow earnings at a faster rate than the market becomes important to investors.”
The fund’s sector allocations reflect its manager’s requirement that companies have a distinct market advantage. The portfolio has no allocation to the consumer staples sector because Milligan believes even the biggest players no longer have the stranglehold on the market they once did. “With online advertising, it’s much easier for smaller, more local brands to gain recognition,” he says. “That’s where buyer preferences are migrating.” Banks don’t fit the fund’s strategy because they have trouble differentiating themselves from one another in a competitive marketplace. Then there are the religious screens, which explain the fund’s small allocation to pharmaceutical companies and to the health-care sector in general.
Still, there are plenty of tech companies that fit the bill. One of them, fund holding ANSYS, specializes in simulation software for many end markets, with technology, aerospace and defense, and automotive accounting for roughly two-thirds of the company’s revenue. Mega-trends like 5G, autonomous vehicles and electrification are radically changing the product development landscape. In addition to field-testing self-driving cars, several major auto companies in the U.S. are using ANSYS’s software as a cheaper way to simulate road conditions for driverless cars.
“While it is difficult to estimate the total market for simulation software, it has the potential to become very large,” says Milligan. “ANSYS software not only expands engineering capabilities and reduces product development time lines, but it also saves money for customers by eliminating the cost of physical prototypes. We see exponential growth once adaption ramps up.”
Another fund holding, Ecolab, is in the more pedestrian business of providing equipment such as soap dispensers and water filtration and purification systems to companies in energy, food and health care, among other industries. Milligan says Ecolab’s firm grip on its niche gives it a solid revenue base and the ability to maintain mid-single-digit earnings growth over the long term. Its businesses have an estimated 11% market share and are well-positioned to benefit from favorable trends in food safety, clean water, energy usage and infection control.
“Ecolab has pricing power because the cost of its products and services are a small portion of its customers’ budgets, and failure in areas such as food safety or infection control can cause significant damage to the customers’ businesses,” he says. “Customer switching costs are high, and the company enjoys a sustainable cost advantage over local and regional competitors in highly fragmented markets.”