Charter plots a steady course

Even in the best economic environment, you are not likely to see the Aim Charter Fund (CHTRX) hitting the top of most performance charts. It is by design that this 40-year-old mutual fund has a lower profile and steadier performance, according to Ron Sloan, who has been lead manager of the $3.5 billion fund since 2002. "You're never going to hear people bragging about this fund at a cocktail party during a bull market, and nobody brags in a bear market," he said. "This is old-fashioned class asset allocation that will hopefully give a much steadier ride." The fund, managed from the San Francisco office of Invesco Aim Management Group Inc. in Atlanta, had declined 31% this year through Dec. 26. This compares with a 40.6% decline by the Standard & Poor's 500 stock index over the same period. The large-blend category, as tracked by Morningstar Inc. of Chicago, declined 40.1% over the period. Morningstar has a four-star rating on the fund. Mr. Sloan maneuvered this fund through much of the carnage that took place in 2008 without tracking the category or the index. The fund was not exposed to some of the biggest financial sector blowups, and it maintained a higher cash weighting, which is currently around 13%. As Morningstar analyst Ryan Leggio pointed out in a Nov. 25 write-up, the fund didn't own Charlotte, N.C.-based Wachovia Corp. (WB) or New York-based American International Group Inc. (AIG), despite buying financial-sector stocks during the spring and summer of 2008. AIG shares fell more than 97% last year, while Wachovia's stock lost more than 84%. At the end of the year, the fund's financial sector weighting was at 15%, which compares with a 5% weighting at the end of 2007. The two largest bank positions in the fund are San Francisco-based Wells Fargo & Co. (WFC) and Minneapolis-based U.S. Bancorp (USB). Well Fargo shares lost 4.7% last year, while U.S. Bancorp was down 20.6%.

A COMMODITY BUSINESS

"The new bank model is a back-to-the-future thing," Mr. Sloan said. "Banking is basically a commodity business that involves buying and selling money, but we saw a lot of banks that got away from that and got caught up in securitization and chasing returns." The portfolio is currently made up of 68 positions, although Mr. Sloan said he would ideally like to have about 75 names in the fund. The more concentrated portfolio is partially the result of the 13% cash weighting, which is actually down from 17%, where it was at the start of 2008. Historically, the fund's allocation to cash has been around 10%. Moving into 2009, some of that cash is likely to put to work. "There are a lot of things to buy out there right now," he said. "At the end of a bear market cycle, the stock market can be very indiscriminate, and my experience tells me we're closer to the end than we are to the beginning of the bear market at this point." The strategy is inherently conservative with a value-oriented emphasis and a historical turnover rate of less than 40%, but Mr. Sloan does make room for riskier positions. He uses a five-tier scale to manage risk within the portfolio. In a portfolio of 75 names, there would be five stocks in Tier One, which represents the positions in which Mr. Sloan and his team have the highest confidence. An example of a Tier One stock is Philadelphia-based Comcast Corp. (CMCSA), which declined by more than 13% in 2008. "The stock has been smashed, but we think people will give up a lot before they give up their cable bill," Mr. Sloan said. There are typically 10 Tier Two stocks, 20 Tier Three stocks and 40 Tier Four stocks. One example of a stock that Mr. Sloan has deemed a higher-risk Tier Four is Dallas-based AT&T Inc. It was down more than 29% last year and, like Comcast, is a telecommunications sector stock. But "AT&T introduces a few more variables in the telephone play," Mr. Sloan said. The investment strategy, which considers only those companies with market capitalizations of $10 billion and above, concentrates on growth-versus-value anomalies. "We're trying to identify good businesses that are selling at short-term mispricings, and we get paid to identify great management teams," Mr. Sloan said. "We want to know if a company generates high returns on invested capital and if they can generate high free cash flow." Questions? Observations? Stock tips? E-mail Jeff Benjamin at jbenjamin@investmentnews.com.