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Quality, Growth, and Valuation
AllianzGI Mid-Cap Fund
Interview with: Steven Klopukh

Author: Ticker Magazine
Last Update: Aug 09, 10:28 AM ET
Finding good companies that are struggling and out of favor is relatively easy, but understanding and detecting the drivers of improvement requires extensive research and knowledge. Steven Klopukh, portfolio manager of the AllianzGI Mid-Cap Fund, relies on the management team’s dedicated staff and sector expertise in identifying beaten stocks that are likely to regain their footing and create wealth for shareholders.

“We do not just pick stocks; instead, we are focused on constructing portfolios where most of the risk is coming from our specific stock selections. Our objective is buying high-quality names at a discount.”
Q: What is the history of the fund?

A: The AllianzGI Mid-Cap Fund was launched on November 6, 1979. When RCM Capital Management merged with Allianz in 2013, RCM was focused more on large-cap growth stock investing and at the time, we were looking for ways to broaden our reach.

Tim McCarthy and I took on the challenge of running this mid-cap portfolio and we have been managing the fund since 2014. The fund currently has assets of approximately $289 million.

Q: How are you different from your peers?

A: What differentiates us from our peers is our focus on risk. Our strategy is to build a diversified portfolio across mid-cap market sectors, but to concentrate the risk at the stock level.

A second point that differentiates us from many of our peers is that we have a dedicated team focused just on this fund. The team is plugged into the resources and leverages the information flow from the RMC research platform.

Q: What core beliefs drive your investment philosophy?

A: Our investment philosophy reflects the heritage of RCM, which is to focus on quality, growth and valuation. We do not just pick stocks; instead, we are focused on constructing portfolios where most of the risk is coming from our specific stock selections.

Our objective is buying high-quality names at a discount. We have 17 analysts located in San Francisco who try to identify growth companies whose value is either understated or underappreciated by the markets.

They identify the company’s key growth drivers and look for a pending catalyst. We then evaluate the drivers and catalyst to determine if they are embedded in the market’s consensus view. Finally, we look at the company’s valuation to determine the degree to which the current discounted value is reflected in forward estimates, multiples and expectations.

For us, company quality is a basic requirement because it provides an additional margin of safety. We look for companies with strong management teams and a clean balance sheet.

High-growth companies often have high operating leverage. We tend to shy away from companies with high financial leverage. A company with double leverage has a much higher risk profile than we are comfortable with, so we focus on high-growth companies with strong balance sheets. In addition to providing a margin of safety, companies with strong balance sheets can take advantage of strategic opportunities or acquisitions to enhanced performance.

For example, we own Newell Brands, Inc. which recently bought Jarden Corp. For Newell, this was a unique opportunity to bring together two businesses and take advantage of a tremendous amount of cost synergies, as well as opportunity to accelerate top-line growth.

Because of their balance sheet, Newell was able to leverage strength and take advantage of the acquisition. Following the acquisition, they have been aggressively deleveraging by utilizing the free cash flow generated from that deal.

Typically, when we look at growth companies we avoid non-earning companies or companies that are far away from generating free cash flow. We usually avoid companies with negative free cash profiles, but we favor companies with good cash flow conversion rates, as well as improving free cash flow outlooks.

Q: What is your investment process?

A: The process starts with the identification of interesting mid-cap names from the Russell Midcap Growth Index list. With over 800 names in the benchmark, there is no shortage of potential ideas or opportunities available.

The ideas may come from a variety of sources like our 17 analysts in San Francisco. Those analysts are all experts in their field and have a tremendous access to company management teams, sell-side resource, and many other resources.

They are our primary source of new positions, and when they make a recommendation, we work very closely with them in evaluating their ideas.

A second source of ideas is from our analysts that manage money. For example, Sebastian Thomas is the head of our technology sector and, with three other analysts, is responsible for $2.5 billion of technology dedicated money.

We look at the names that Sebastian is buying in areas like artificial intelligence. If a company falls within the mid-cap universe, we will give it a look. We use these sector fund analyst, who have expertise in technology, healthcare, energy, and other sectors, as a source of ideas.

Finally, we talk to companies, meet with analysts, and look for broader thematics. We also incorporate some quantitative analysis; but for the most part, the quantitative work is less about sourcing new ideas than identifying broader themes.

Q: How do you evaluate individual opportunities? Can you describe some examples?

A: One recent example is our decision to buy Coach, Inc. Retail is a very challenging area especially with big box retailers continuing to struggle and mall traffic declining.

We viewed Coach as a differentiated name within the broader retailer space. They had been going through a very painful restructuring process for about three years due to their mall exposure. However, we believed that they had a number of exciting growth opportunities.

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Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc