A HOT HAND AT GE INVESTMENTS AFTER BEING HIDDEN FROM THE PUBLIC AT GENERAL ELECTRIC'S ELFUN TRUSTS FOR YEARS, DAVID CARLSON FINALLY STEPS INTO THE LIGHT.
(FORTUNE Magazine) – Call him Jack Welch's unofficial morale booster. Because for the past eight years, David Carlson has done his part to keep the folks at General Electric happy. As the portfolio manager of Elfun Trusts, a $1.6 billion mutual fund available only to GE employees, Carlson has hit it right time and again, delivering consistent, market-beating gains, including a 19.9% annualized return over the past three years.
What's Dave's secret? With both Elfun Trusts and his newly launched GE Premier Growth Equity fund--a more aggressive version of Elfun Trusts that is open to the general public--"we look for companies that dominate their industries and have sustainable double-digit growth rates, strong financial characteristics, and shareholder-oriented management."
Come on, Dave. That's the mantra every growth stock guru chants. Isn't there more to it than that?
Sure, you've got to be in the right place at the right time. We're large-cap, growth-stock oriented, and that's what the market has favored in the past couple of years. We've also been overweighted in financial stocks and the big drug companies, and both have performed wonderfully.
What's your biggest holding?
Travelers, which has gone up 40% to 50% a year for the past two years. Different fund managers can follow the same overall guidelines, but it's the individual names in the portfolio that matter.
How did Travelers become such a big part of your life?
It started out as a bet on management, and to a large extent it still is. When Sandy Weill landed at Commercial Credit back in the 1980s, one of our analysts heard him speak at a meeting and said, "we've got to buy the stock." It worked well for a while. Then the company bought Primerica, and the stock tanked. We bought more at that point because we figured Sandy would make Primerica work, which he did, and we have been buying ever since.
The company never really gets the respect it deserves because of its Smith Barney exposure. It gets valued like a brokerage stock even though there's lots more to it. Through the reinvestment of cash flow and acquisitions, Travelers has consistently grown better than 15% annually. Sandy has to keep pulling rabbits out of his hat to make it all work, but he does that extremely well.
Do you own any pure brokerage stocks?
No. I think the market is nearing a cyclical peak, which means that when it tops out and goes down 10%, brokerage stocks will fall 20% or more. My approach would be to buy them during the correction, after they get whacked.
Is the market due for a correction?
It's overdue, but I've given up forecasting. In July of 1990 I told a group I thought everything was a go for higher prices, and three days later Kuwait was invaded and the market dropped 20%. That was my cue to get out of the forecasting business. But we've gone six years without a 10% correction. All the signs of a market top are here. It may not come in the first half of the year, but I think we'll see a correction sometime in 1997.
I hate to sound like a broken record, but that's also what every portfolio manager I talk to is saying. Doesn't that trouble you?
Someone recently described what we're experiencing as a Main Street market, by which he meant that the public is fueling the money flow into equities. Professional investors see it as a tidal wave. We're fully invested, knowing that we've broken through all the historical valuation benchmarks, knowing that when something comes along to change the direction of the wave--it could be a recession, it could simply be the public deciding that bonds are a better short-term value than stocks--there's going to be a huge flow of money out of equities. All you have to do is hit the 1-800 button, and you move your entire 401(k) from fund A to fund B. When that happens, we could have a crash-like condition.
How do you position yourself for a crash?
You can't, particularly given our size. GE Investments has $58 billion under management. We'd never claim to be the first to see a crash coming or that we're nimble enough to move billions out of the way.
What percentage of your portfolio is cash?
About 6%. Since we've never demonstrated great success at market timing, we generally run the funds fully invested.
Let's roam through your portfolio. What's the thinking behind your cellular exposure?
I've been buying Airtouch Communications steadily for the past year. It's the largest cellular company in the U.S., and about a third of its business is international. They should be able to increase cash flow in excess of 20% a year for at least the next five years. The stock trades at ten times 1997 cash flow, and that's with a lot of its international business still in the red. If you were to take international out of the numerator, you could argue it's selling at seven times domestic cash flow.
You could also argue that they're beginning to get competition from PCS technology.
Absolutely. Cellular stocks have been out of favor because of the startup of personal communications systems, which is a competing product, but I think the fears have been overdone. In the U.S. and European markets where PCS is turned on, it has not significantly slowed the growth of cellular.
Tell me about Reuters.
I've held Reuters since 1986. It's a great company that dominates its market. The bulk of earnings comes from foreign exchange quotes and trading, but they are becoming the preeminent supplier to all the financial markets--equities, fixed income, and commodities.
There were rumors a few weeks ago that Reuters was talking to Dow Jones, presumably about Telerate.
It wouldn't surprise me to learn they were talking, but I'd be stunned to see a Reuters acquisition of Telerate. Reuters has been spending heavily the past few years on a competing product. Other than the customer list, I don't see a fit, unless it was at such an attractive price it worked on a numbers basis. Like Quotron. When Reuters bought Quotron from Citicorp, Citicorp agreed to fund the operating losses for two years while it was integrated, so Reuters had no financial exposure.
You own a few stocks that aren't household names. What's Arbor Drugs?
The No. 1 drugstore chain in Michigan. Arbor Drugs is a mid-cap company, still largely family owned, that has been adding stores rapidly while still growing sales at existing outlets at an industry-leading pace. I suspect it will one day become part of a larger chain. If it doesn't, it can grow very nicely on its own.
What's Catalina Marketing?
A point-of-sale marketing services company that's increasing earnings at well over 20% a year. When your goods are scanned at a supermarket checkout counter, the back of your receipt will often contain coupons that were printed as you went through the line. Chances are it was done by Catalina Marketing, which might have a deal with, say, Progresso. If you bought some Campbell soup, you might wind up with a 30-cents-off coupon for Progresso soup. The response rate is maybe five times what companies get from the coupons that fall out of your Sunday paper.
It's a little strange to see Travelers and Carnival Corp. in the same portfolio.
Carnival is the largest cruise line company in the world. They've contracted to have a series of ships delivered over the next three to four years, so we know that growth in capacity is going to be at a low-double-digit rate. Then you make a bet. Are they going to be successful filling their new ships? We think they will and that yields will grow in single digits, so you wind up with 15% overall growth.
Interpublic also seems out of place.
It's a low-double-digit grower, but Interpublic is the No. 1 advertising agency in the world and arguably the best managed. Again, big global exposure. About two-thirds of earnings come from outside the U.S. The CEO and the CFO have been a team for at least 15 years, and they've grown the company at a double-digit clip. It's been a great holding.
One of the themes that come through is that you're getting your international exposure through domestic companies.
Correct. I've been shifting lately toward companies that can hit their growth targets without the need for a strong U.S. economy. I don't see a slowdown--I buy the consensus outlook of 2% to 3% growth in 1997--but we're in one of the longest peacetime expansions ever. I worry more about its ending than continuing.