Brian O'Toole is looking for high quality.
That's the key to the investment strategy used at the Voyager Fund, Putnam Investments' flagship U.S. large-cap growth fund, said Mr. O'Toole, managing director and chief investment officer for Putnam's large-cap growth team.
Portfolio managers for the fund invest only in what they consider high-quality companies. "The data suggests we can get 200 basis points of excess return by investing in high-quality companies, that translates into good performance," he said.
"By high quality, I mean companies with better earnings than the market; with earnings that are driven by sales that are better than the market," Mr. O'Toole emphasized in an interview. He also looks for companies that are "consistent in their earnings and have strong balance sheets and low debt relative to total capital."
He also noted that investors are focusing more on high-quality companies these days as earnings growth has decelerated, a trend he expects to continue.
The $18 billion Voyager owned 188 stocks as of March 31. "They're not all in the S&P, and they may not all be in a growth benchmark. It's our definition, and we create the universe," said Mr. O'Toole. Voyager gained 24.7% in 2003, compared with its benchmark, the Russell 1000 Growth index, which rose 29.75%.
Companies Mr. O'Toole currently favors include Capital One Financial Corp., a credit card issuer that has outperformed by dramatically reducing loan payment delinquencies; and Career Education Corp., which operates advanced-degree programs in such specialties as computer science, culinary arts and visual design. Last year, 94% of its culinary arts and business graduates were placed in jobs within six months of completing their degrees, and company earnings were up 17%, Mr. O'Toole said.