PHILADELPHIA -- It's not always easy to separate the latest fads from the secular changes that cause major shifts in the way people live. But Stephen Dalton, senior portfolio manager at First Capital Group, Philadelphia, has had great success for the past four years doing just that.
Mr. Dalton manages assets of about $1 billion in commingled funds and individually managed accounts in what he calls a "secular growth" style.
His fund returned 41.5% for the year ended Dec. 31, compared with 38.7% for the Russell 1000 Growth index. For the past four years, the fund returned a compound annualized 33.1%, vs. 32.3% for the Russell 1000.
"When we talk about secular growth, we mean trends that will cut across business cycles and are embedded and entrenched in the economy and society," he said.
Mr. Dalton -- supported by a team of analysts, including three additional portfolio managers -- combines research on secular trends with a bottom-up stock selection approach and quantitative research to select which large-capitalization companies are in the best position to benefit from these trends.
The biggest secular trend he has identified is the Internet.
"We're at the very early stages of the most important secular trend of the 20th Century -- the Internet," said Mr. Dalton. "There are things we haven't seen yet," he said, predicting platforms for new products still to be developed.
"We're trying to invest in the backbone of the Internet. We're taking the most conservative approach to identify companies that are exploiting this trend."
Companies he likes best are those involved with bandwidth technology, which provides high-speed data transmission over the Internet. Mr. Dalton calls it the "virtual circle -- where demand for Internet access increases the demand for bandwidth technology, which increases the demand for Internet access, etc."
Among the companies in which he has invested for exploiting this trend are Cisco Systems Inc.; Sun Microsystems Inc.; Oracle Corp.; Ascend Communications Inc.; and MCI/WorldCom Inc.
His fund also owns stock in Global Crossing Ltd., whose main business is laying the transoceanic fiber cable for high-speed voice and data transmissions between the United States, Europe, Asia and Latin America.
"There's an insatiable need for bandwidth and high-speed data transmission," he said. "We like to find stocks that give us tailwinds and will take us through market turbulence."
Mr. Dalton is not interested in currently hot stocks, including Amazon.com Inc. and eBay Inc. He thinks companies that are selling products or services over the Internet are more risky.
This is partly because he doesn't think that the so-called e-commerce, despite its quick growth, will have a major negative impact on the best-run retailers. The secular trend affecting retailing, said Mr. Dalton, is that "the consumer is changing very quickly. He wants high value and low costs," and companies that can't adjust will get left behind.
Companies in his portfolio that he thinks are well-prepared for handling this trend include Wal-Mart Stores Inc.; The Gap Inc.; Dayton-Hudson Corp.; and The Home Depot Inc.
"Wal-Mart and Dayton-Hudson (with its Target Stores discount division) are superb operators of discount stores," which give the consumer low prices and high value, said Mr. Dalton.
He thinks Home Depot, which at 3.5% is one of his portfolio's largest holdings, is "excellent in the home improvement subsector."
Moreover, "I fully expect over the next 18 to 24 months that each of these companies will expand its presence on the Internet in ways that enhance, not cannibalize, their existing businesses," said Mr. Dalton.
In the communications sector, Mr. Dalton is a big fan of Time-Warner Inc., New York, because it is taking advantage of the secular changes in the communications area. Time-Warner's "cable and media content are two components necessary to fill part of the requirement of the Internet for content," he said.
