The world according to GARP has grown steadily in the past three years, although it might not always be what it seems.
With the demise of the so-called "nifty 50" group of super growth stocks in the late 1980s, a group of money managers following a style known as growth at a reasonable price emerged, telling the financial world they would no longer pay any price for growth.
While there are numerous money managers claiming to blend both growth and value approaches, and others claiming to be growth managers that apply a value screen, there are only a dozen or so pure GARP managers, according to Dennis Tritin, director of investment strategy at the Frank Russell Co., Tacoma, Wash.
GARP managers, most of which have emerged in the past five years, don't just blend two disciplines. Rather, they are a distinct class of money manager with their own stock selection process and universe of stocks.
Frank Russell now has a universe of 10 GARP managers, accounting for about $67 billion in total assets, said Mr. Tritin. He said Russell started classifying certain managers as GARP in the late 1980s after finding with some managers "we couldn't correlate return patterns with growth or value and found these managers were a horse of a different color.... We classified them into a market-oriented style for growth at a price."
Now, he said, there are some money managers that classify themselves as GARP managers that "we wouldn't classify them as. .. It's a category that is subject to bias. It's a term that is very appealing to potential clients.
"We call GARP managers those whose portfolios have above-average profitability as measured by such things as return on equity, reinvestment rates, earnings and dividend growth. Above-average companies with below-average price multiples over a longer term," said Mr. Tritin.
General Electric Co. and the Federal National Mortgage Association are "classic examples" of GARP stocks, said Mr. Tritin. GE, a large diversified company, "would not excite most growth managers, but the company is expected to do well, does not have much of a premium, sells close to market multiples and has stable earnings growth."
Fannie Mae has been an "earnings machine" for several years, he said, and while it now is facing market concerns because of economic uncertainty, it still is selling around nine times 1994 earnings, "substantially below market even though growth has been far above average."
As a group, GARP managers have performed reasonably well. The median GARP manager was up an average of 10.8% for the five years ended Sept. 30, compared with 9.1% for the Standard & Poor's 500 Stock Index, according to Russell. For the 12 months, the median GARP manager was up 7.6% compared with 3.7% for the S&P. During the third quarter of last year, GARP managers were up about 6.1% compared with 4.9% for the S&P.
Richard M. Burridge, chief investment officer at the Burridge Group Inc., Chicago, said GARP managers emerged after the health care and consumer staples stocks that made up much of the "nifty 50" fell back to earth after a long period of stellar growth.
"The nifty 50 represented growth at any price. Growth at a price is just to make the point that we aren't going to pay anything for some stocks. We look for companies growing at 15% to 25% in earnings over the next two to three years. We wouldn't buy a stock with a multiple of 15 and growing at 12%," he said.
Examples of stocks in the Burridge portfolio include Microsoft Corp., Mentor Graphics Inc., Dollar General Corp. and Houghton Mifflin Co.
Michelle Claymon, chief investment officer at New Amsterdam Partners L.P., New York, said she first heard the term GARP used in April 1992. She said applying the GARP discipline "means we try to find faster growing companies that for some reason are selling at relatively cheap multiples. A key difference between GARP and growth managers is that we tend to look at longer term growth rather than quarter over quarter or year over year."
She said stocks followed by GARP managers are "not go-go growth nor are they cheap. They don't have the highest growth rates nor are they always the cheapest. It's an area which growth or value managers might ignore; stocks that teeter around the border," said Ms. Claymon. New Amsterdam uses a blended quantitative/fundamental approach. The stock selection screen identifies companies with five years of positive return on equity and five years of complete accounting data. In addition, only companies with a minimum average daily trading volume of $1 million and a minimum of four analysts following the company make the cut.
The 1,000 to 1,500 companies passing the screens then pass through the New Amsterdam quantitative model, which computes an expected return for each company based on estimated earnings per share, estimated growth, forecast return on equity, and current and forecast price-to-book ratios. The 100 companies with the highest expected returns comprise the candidate list. Of those, about 35 companies will be held in the current portfolio.
Five companies selected from the initial 100 stocks are selected for fundamental analysis by the New Amsterdam investment staff for possible inclusion in the active portfolio on a monthly basis.
Buy candidates are those with a minimum computed 5% to 6% rate of return over the expected market return.
Major holdings in the New Amsterdam portfolio include Merck & Co., Health Management Associates, Cabletron Systems Inc., and Mobil Oil Corp.
The principal difference between growth managers, value managers and GARP managers is the time horizon used to view a stock's potential, said Jim Barksdale, chief investment officer at Equity Investment Corp., Atlanta.
"I think that when I buy a stock, over the long term the company will grow my capital but it may take hits in short-term earnings that may cause a growth manager to sell," he said. "I will buy higher p/e if the company can give me enough growth looking further down the road."
Major positions in Mr. Barksdale's portfolio include Pitney Bowes Inc. (a company with a history of positive growth, said Mr. Barksdale, that has seen its short terms earnings momentum slow), Anheuser-Busch Cos. Inc. and A.G. Edwards & Sons Inc.
While most GARP managers are domestic stock managers, the discipline is being used by at least one global/international stock manager.
Joseph D. Read, president of GIM Capital Management Inc., Summit, N.J., the U.S.-based operation of the Dutch company GIM Algemeen Vermogensbeheer, said GIM follows the GARP approach in its global portfolio.
He said the definition of a GARP stock varies depending on the country, but in general GIM looks for at least a 20% per annum history of earnings growth and "we try to buy at a multiple close to the market multiple in the country market."
Examples of GIM portfolio holdings include Alusuisse-Lonza, Jefferson Smurfit Group, General Property Trust (Australia) and Property Trust of America.