In the fund’s performance numbers since September 30, 2008 (the last reporting period before the pair assumed their roles of co-portfolio managers), Gershuny says the Mid Cap Fund’s investor shares produced annualized returns of 12.1% versus 12.3% for the Russell Midcap Index. Its beta versus the benchmark during this period was 0.82, and its annualized upside capture was 84.1 and the downside capture was 79.2.
“And over the past 10 years,” Gershuny says, “the fund has gained 12.39% versus 12.41% for the benchmark, which is 99% upside capture and with a 0.81 beta. And in the 10-, five- and three-year periods we’ve been in the top 10% relative to our Lipper peer group fund category.
“I’m not saying we’re not celebrating that we don’t beat the index on an outright performance basis over the long term, but given what the fund has done historically, if we saw more volatile markets we could expect the fund to provide the downside risk that we’ve offered over the past 12 years,” he adds.
Looking ahead, Gershuny and Keith are adjusting their investment focus—and their work habits—to the current pandemic environment. Company visits have been replaced by Zoom chats. And instead of speaking five to 10 times a day like they did in the company’s San Francisco headquarters, they now speak several times daily over FaceTime or Zoom.
“This has forced us to think more long term and to prioritize what we’re working on,” Keith says. “We can’t just walk down the hall for a casual conversation; we have to deliberatively set up something.”
The fund’s sizable staff includes various research analysts focused on particular sectors, and Gershuny says they’ve had to adjust the frequency and types of interactions the teams have. “We’ve created random chats to replicate the casualness of certain types of conversations that happen in the office.”
Gershuny cites the expected economic recovery, low inflation, accommodative Federal Reserve policies and vaccine rollouts as possible positive catalysts for investing. But he’s concerned about the market’s valuations, noting that the Russell Midcap Index recently traded at nearly 23 times forward earnings estimates while the average 20-year multiple was closer to 16.
“I think the takeaway is that our focus on quality companies that have gained share and created a sense of positive momentum going into the next 12 and 24 months is now more important than ever,” he says.
The fund is overweight in information technology, industrials and health care. Among the companies Keith spotlights is KLA Corp., which she calls the 800-pound gorilla in the semiconductor measurement inspection industry; it has a market share of more than 50%, more than four and a half times the share of its next competitor. “Having significant share in this industry allows it to invest more R&D dollars to create more differentiated products and ultimately command higher operating margins than their competitors,” she says.
She also highlights Nuance Communications Inc., a provider of software and voice technology mainly used by health-care offices and hospitals to make their workflows more efficient. “It’s an asset-light company with a strong business model supported by a high degree of recurring revenue.”
Gershuny is excited about a new fund holding, Grocery Outlet Holding Corp., a food retailer located mainly on the West Coast that sells discounted, overstocked and closeout products from name brand and private label suppliers.
“It has had 16 consecutive years of positive same-store sales growth,” he says. “It just went public, it has a great management team, and it’s a great relevancy story from a food-waste perspective. It’s a highly scalable model, and it has a very small market share in the U.S. food retail space at about 30 basis points, which we think could double by 2025.”
While the two portfolio managers are optimistic about the overall investment picture, they’re mindful of potential pitfalls beyond high valuations.
“In our opinion, the Covid immunization program won’t be straight up and to the right,” Gershuny says. “There will be restarts and pauses, and we want to be positioned in the best-quality companies we think will emerge from this pandemic.”