Quality Over Quantity

Transamerica is known for insurance and for its pyramid-shaped skyscraper in San Francisco. But mutual funds? Yes, if Glen Bickerstaff has any say in the matter.

Bickerstaff runs Transamerica Premier Equity Fund, a 2-year-old fund that is off to a robust start, posting a total return of nearly 85% for the 24 months through November. The fund was created as a retail mutual fund version of a larger and older portfolio of stocks that Bickerstaff manages for Transamerica itself--a portfolio that has bested the Standard & Poor’s 500 index in each of the last eight years.

All told, Bickerstaff, who works at the company’s Los Angeles office, oversees $2.6 billion in stocks, including $108 million in Transamerica Premier Equity.

Bickerstaff, 41, was born in Long Beach and earned a degree in finance from USC in 1980. He worked in the investment departments at now-defunct Security Pacific Bank and at two other companies before joining Transamerica in 1987. Bickerstaff, who is married and has two children, plays golf and coaches his son’s baseball team when not at the office. Russ Wiles, a mutual fund columnist for The Times, spoke with him recently.

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Times: Your fund appears to focus on top-quality stocks selling at attractive value.

Bickerstaff: Yes. But while we do valuation work on the companies we buy, we emphasize the quality. . . . We look for unique businesses. That’s more important than the valuation component. Because if you find great companies, they will grow into the valuation, even if you paid a little too much in the beginning.

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Times: What makes a company unique?

Bickerstaff: Management is the most critical variable. We like management teams that take a long-term perspective in growing their businesses and that have demonstrated they’re capable of maintaining a competitive advantage, year in and year out. Characteristics we like to see are things like proprietary products or a low-cost production or distribution capability that makes them highly competitive.

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Times: How do you evaluate management?

Bickerstaff: It’s important to see if they’ve had success in the past. Also, we like to talk to managements about what’s changing, because that generally leads to a conversation about where they think their opportunities are. Management should be able to articulate clear plans for taking advantage of change and enhancing the company’s inherent advantages. When a management has a track record of doing that and can articulate its plans, that makes us comfortable.

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Times: Over the fund’s first two years, you achieved nearly double the return of the average growth fund. What are you doing right?

Bickerstaff: Two major themes run through our portfolio. One involves the proliferation of technology, especially personal computers. We have 22% of the fund’s assets in technology now. We own Dell Computer, which we think is the lowest-cost distributor of personal computers. We own Intel, which is the dominant hardware supplier, with over 80% of the market share in microprocessors. We own Microsoft, the dominant software supplier to the PC world. We own Cisco Systems, which is the dominant company in terms of linking computers through e-mail, the Internet and the intranets that many companies are developing.

We think the personal computer is a unique machine in that it has evolved very rapidly to meet all of the demands placed on it. It started out as a simple word processing box. As graphics became better, it became a desktop-publishing tool. Spreadsheets made it a financial tool. And now with the need to communicate from one part of a business to another or one part of the world to another, personal computers have become a communication tool. We think this personal-computer trend is far from over. We’re confident it will continue, not just in the United States but internationally.

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Times: What’s your second big theme?

Bickerstaff: Financial services, which accounts for about 15% of portfolio assets. There’s a tremendous demand for information and services in the financial area, especially from aging baby boomers who are concerned about the viability of government retirement programs. Individuals increasingly are taking it upon themselves to provide for their own retirement. Companies like Charles Schwab are at the forefront of bringing financial services to individuals. Two other stocks we own are Franklin Resources and T. Rowe Price, both mutual fund companies.

The oldest baby boomers have reached their 50s, and there are a lot more of us behind them who will be entering the same saving-oriented phase in our lives. If you think back to California in the 1970s, you will recall how this generation exerted quite an impact on real estate prices as people bought homes for the first time. That trend endured for years. We think this trend in financial services will continue into the next century.

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Times: Speaking of California, it’s hard not to notice that several of your companies are California-based, such as Intel, Franklin Resources and Charles Schwab. Do you have a bias toward California companies?

Bickerstaff: No. It’s notable that we like technology and that many technology companies are located in Silicon Valley. But the California weighting is not by our design, since we look anywhere for stocks. It’s helpful if the companies are close by, since we can visit with managements more often. But that’s not going to stop us from trying to find a great company somewhere else.

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Times: You indicated earlier that the fund takes a concentrated approach.

Bickerstaff: Yes. There are generally 30 to 40 stocks in the portfolio at any time. We don’t believe in over-diversifying by owning 100 or 200 companies, because we think we can understand 30 or 40 better than 200. Also, we want those companies that we understand best and in which we have the greatest confidence to exert the biggest impact on our returns. We don’t serve shareholders by diluting those results for the sake of owning more stocks. Part of our philosophy involves maintaining a concentrated portfolio.

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Times: Is there a company that epitomizes what you look for?

Bickerstaff: Intel. This is one of the best-managed companies around. It certainly has proprietary products, and management has developed business plans to take advantage of the firm’s proprietary products. With each new generation of microprocessors, Intel has increased its market share despite the fact that many clone manufacturers have come along, as have a lot of other chip designs that were thought to be superior.

The company possesses many of the characteristics that we look for, and it has sustained them for a long time.

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Times: We talked earlier about the fund’s strong two-year return. But your 6% loss in October put you near the bottom of the pack for that month. Any explanation?

Bickerstaff: We participated in that downdraft like everyone else. We were up more than 50% during the first nine months of 1997. When the market starts to decline, stocks that are up a lot are psychologically easier for people to sell. So they face a steeper decline when the market heads lower. But they also recover faster because they had gone up for the right reasons. Many of our holdings had large upward movements, they corrected, and now they have recovered. In any one month or quarter or even several quarters, the performance of a portfolio of 30 to 40 stocks might not look great. But by owning companies with the characteristics that we do, I think our record over the long term will be very good.

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Times: The October correction was precipitated at least in part by economic turmoil in Southeast Asia. How might that affect your stocks?

Bickerstaff: It’s helpful to look at it in the context of individual companies.

Dell Computer, for example, generates about 8% of its revenues in Asia, so the company certainly could be impacted if the Asian economies do poorly for a while. But a lot of Dell’s components come from Asia, and prices are dropping very rapidly on those components because the economic crisis was precipitated by an overcapacity in manufacturing in Asia. I wouldn’t say the Asian economic difficulties are positive on balance for Dell, but the company is benefiting from the rapid decline of component costs, perhaps at a faster rate than it’s being hurt by the economic slowdown. We don’t think what’s going on in Asia will dramatically impact any of our companies.

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Times: As a rule, do you stay fully invested?

Bickerstaff: Yes. We’re essentially fully invested and have been since the fund started. We do no market timing.

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Times: It’s hard not to detect your underlying bullishness.

Bickerstaff: Our long-term outlook is very positive. The overriding factor is the absence of inflation, which means growth is worth more. If you can find growing companies, especially those that are increasing unit volumes without having to rely on price increases, they will become more valuable. The fact that market valuations have gone up is not surprising. They should have gone up, because companies that are showing growth, especially 10% growth and above, are very valuable assets in an environment where inflation is near zero. We don’t see any reason for inflation to come back any time soon.

The corollary to low inflation is that interest rates are in a long-term decline, with the potential for rates to go significantly lower than they are now. That’s another reason for valuations to go up. Again, in an environment where inflation is low and interest rates could go lower, great companies that show strong earnings and cash-flow growth should receive high valuations, because the growth of these companies enhances your wealth at a much faster rate than inflation erodes it.

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Glen Bickerstaff is scheduled to appear on the Advanced Stock Selection panel on the first day of the Los Angeles Times Investment Strategies Conference, Feb. 7-8. Call (800) 350-3211 for information.

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Transamerica Premier Equity Fund

Strategy: Seeks capital appreciation by investing in U.S. companies with strong earnings or cash flows, dominant market shares and superior management.

Vital Statistics

Year-to-date return: +51.3%

Avg. growth fund, year-to-date return: +26.0

2-year average return, through Nov. 30: +35.9

Avg. growth fund, 2-year avg. return: +21.5

Five biggest holdings as of Nov. 1:

1. Fred Meyer 2. Dell Computer 3. Mirage Resorts 4. Intel 5. Charles Schwab

Sales charge: None

Assets: $108 million

Min. investment: $1,000

Phone: (800) 892-7587

Morningstar performance rating, 1-5: too new to be rated

Sources: Lipper Analytical Services, Morningstar