Investment success often depends on having the discipline to stick with a strategy, even when it may no longer be in vogue on Wall Street.
Growth stocks' popularity is cooling as investors shift to cyclical stocks.
"We don't expect anything explosive in growth stocks this year," says Roger Engemann, who manages the Pasadena Growth Fund in Pasadena, Calif.
But that won't deter his appetite for growth stocks, Mr. Engemann says.
"We want companies that will grow fast or for the long-term," Mr. Engemann says. He says it's a strategy that's worked for him since he started managing money in 1969.
Growth stocks have generated strong returns for Pasadena Growth, launched in 1986. The fund is up 26.68 percent in the 12-month period that ended March 31, according to Lipper Analytical Services Inc., a mutual-fund rating service in New York. For the three-year period that ended March 31, the fund gained 95.52 percent, Lipper says.
"The fund's strategy is simple: It measures success in terms of earnings growth," writes Tom Desmond, an analyst with Morningstar Inc., a mutual-fund rating service in Chicago. "Management generally limits itself to two company types: high-growth opportunities and well-established earners that have more growth ahead."
As a result, the fund's portfolio typically reads like a Who's Who of American growth companies.
Mr. Engemann readily concedes that he's almost always bullish on the stock market.
"I'd rather take a chance of buying at the top than not buying at all," he said.
The $450 million fund's holdings include such steady growers as Coca-Cola Co., Food Lion Inc., Home Depot Inc., Gillette Co., ConAgra Inc., Microsoft Corp. and Philip Morris Cos. Inc.
Wal-Mart Stores Inc., the nation's largest retailer, has been in the fund's portfolio since the retailer first offered its stock to the public in 1970.
Mr. Engemann, who holds 120,000 Wal-Mart shares in the fund, says he was an early believer in the retailer. The 51-year-old money manager says he was impressed with the late Sam Walton and his concept of putting large discount stores in rural communities, which he says they discussed at length on hunting trips.
"Life won't be the same without him," Mr. Engemann says. "But he has really instilled his spirit on the company."
Charlotte, N.C.-based NationsBank Corp. is also among the fund's top holdings.
"We think their earnings will grow very rapidly," he said.
The bank's huge write-offs last year don't concern him.
"When you're out of favor, you'll write off everything," he said. "We feel the banks are still very much out of favor.
"We feel in five or 10 years, hopefully five, that banks will trade at higher (price-earnings) multiples," he said.
Other banks in the fund's portfolio include BankAmerica Corp. and Wells Fargo & Co., both based in San Francisco.
Mr. Engemann continues adding to his stake in growth companies whose shares are trading at or near all-time highs.
"I don't think people have absorbed the fact that inflation is under control," said Mr. Engemann, who expects annual inflation to be 2 percent or less in the 1990s, while some market watchers anticipate prices to climb 3 percent to 5 percent a year.
The economy and the stock market usually thrive in an environment of low inflation and low interest rates.
Among Mr. Engemann's new ideas is a longtime favorite of growth stock aficionados -- McDonald's Corp.
The fast-food restaurateur recently returned to the fund's portfolio after being absent since 1987.
"A growing portion of their business is outside the United States," said Mr. Engemann, who expects people overseas to have a good appetite for Big Macs.
But not all of Mr. Engemann's growth stocks weathered the recession as well as he had expected.
He cited the Walt Disney Co., Capital Cities/ABC Inc. and the Washington Post Co. as examples of such companies. Walt Disney was hurt by fewer people attending its theme parks.
Several media companies, including Cap Cities and Washington Post, saw advertising revenues plummet during the recession.
Mr. Engemann says he held onto the three companies despite disappointing earnings. The companies are well managed and earnings will improve in the recovery, he said.
Individuals considering an investment in Pasadena Growth should keep in mind the significant volatility resulting from the fund's earnings-driven strategy, cautioned Morningstar's Mr. Desmond.
"Investors willing to stomach these periodic drops should enjoy healthy long-term results," he said.