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Pity the working portfolio manager. He or she is doomed to butt heads with a two-headed demon. The first is the relentless Standard & Poor’s 500 index, used to measure every year’s performance. And, for an encore, the manager’s competition and primary nemesis is none other than the index fund, a pesky rival that not only tracks the S&P 500, but has regularly trounced the returns posted by about 75% of the mutual funds over the past few years.
What’s a bete noire for most professional investors has so far posed little problem for Carlton Martin, the Jamaican-born portfolio manager of TIAA-CREF’s new Growth & Income Fund (800-223-1200; www.tiaa-cref.org). That’s because New York-based TIAA-CREF, long noted for growing teachers’ pension funds, last year launched Martin’s and four other mutual funds with a strategic twist: a combination of an enhanced index portfolio with a jolt added from a group of select stocks. By that reasoning, the funds could keep fairly close tabs on the market’s performance while beating the S&P 500 index whenever possible.
Since the fund’s inception last September, Martin and company have delivered. At press time, it had posted a total return of 29.18%, compared to 27.72% for the S&P 500. Through the first half of this year, the fund logged a 19.19% total return, compared to 17.71% for the S&P 500, and far beyond the 11.62% average for mutual funds in the same category, according to Lipper Analytical Services.
As you might guess, the combo fund requires a dual investment approach. In general, roughly half of the Growth & Income Fund is managed by a team of quantitative analysts, or “quants,” as they’re called in the industry. Their job is to gauge the fluctuations of the S&P 500. Then, by sophisticated mathematical magic, quants park fund assets in many of the index’s stocks, at the same time exchanging a few of the shares for companies that stand a good chance of adding a boost to the portfolio. The other 50% of the fund, the portion Martin actively manages, is sent looking for inviting stock opportunities that will juice up Growth & Income’s overall return.
The job of providing a little extra octane to the fund’s return invariably draws Martin to industry sectors he feels have the oomph to keep ahead of the market overall. That doesn’t automatically mean he’s carrying a bushel of glamorous technology stocks. “Because of problems in Asian markets and the fact that sub-$1,000 personal computers are squeezing profit margins, we’re staying away from the traditional semiconductor or computer stocks for right now,” he says.
Instead, Martin’s currently gravitating toward both telecommunications companies and telecom equipment makers, where recent legislation has opened up a free-for-all in local markets. Other favorites include pharmaceutical companies, although Martin says a run-up in prices of companies like Pfizer (NYSE: PFE) over the past year makes him a bit cautious.
Within industry groups, Martin likes front-runners. “I’m looking for the No. 1, 2 or 3 company in the industry, and preferably one with a proprietary