Manager Works on RS Fund Turnaround

12.07.2007 15:38 Computers - Source: Forbes

It's early yet, but it looks like RS Core Equity Fund may be Mani Govil's second turnaround of a mutual fund.

In all but one of the five years from 2000 through 2004, RS Core Equity was outperformed by more than 90 percent of similar large-cap blend funds, as tracked by Chicago investment-research firm Morningstar Inc.

Since Govil took the reins of the $909 million fund in 2005, its performance has sparkled. In 2006, the fund's total return of 16.9 percent qualified it for the 11th percentile of similar funds - meaning it outperformed almost nine out of 10 rivals - and by the end of June, it ranked in the second percentile for year-to-date performance among such funds, according to Morningstar.

Previously, Govil had revitalized the $450 million Mercantile Growth & Income Fund, the flagship offering of Baltimore-based Mercantile Capital Advisers. The Mercantile fund was in the bottom quarter of its peer group in the year before he started in April 1996. The fund was in the top fifth of its peer group from May 1996 through July 2005, when Govil departed, according to Morningstar.

In turning around RS Core Equity, Govil changed the portfolio, and trimmed the number of stocks to 52 from 117. The portfolio's turnover rate tells the tale. It was close to 100 percent in the first 12 months of his tenure, and its year-to-date aggregate turnover is about 28 percent.

But he also made staff changes. Some people were let go, and so far six analysts have been hired while another joins his team later this month.

Govil joined San Francisco-based RS Investments in August 2005. It's an independent subsidiary of Guardian Investor Services LLC, which is a unit of Guardian Life Insurance Co. of America.

A soft-spoken, bespectacled man who grew up in Mumbai, India, Govil admits he took on management of the RS Core Equity Fund with some trepidation. Despite his prior turnaround of the Mercantile fund, he says, "You always approach the next turnaround with some nervousness." And while the Mercantile turnaround was a gradual process, with RS Core Equity it was "from day one; it was bang, bang, bang, bang, bang, bang. There was no learning curve," he says.

Govil earned his bachelor's degree at the University of Bombay and his MBA from the University of Cincinnati. He now manages $2.4 billion in total, including RS Core Equity and separate accounts with similar mandates. He considers RS Core Equity an "all-weather fund."

"This is where people are putting their retirement funds," he says, adding that his own retirement money and children's college savings is invested in the fund. In addition, he notes that his compensation is performance-driven.

When he took over, RS Core Equity's capital losses were about 51 percent of the portfolio. That had some benefits." For all this appreciation we've delivered over the last couple of years, we haven't had to pay any taxes on it" because of the sheltering effect of the capital losses.

"We were tying to pick the best possible names from an appreciation point of view," he says. Out went Bank of America Corp., Citigroup Inc. and Wachovia Corp. A bit later, Govil purchased JPMorgan Chase & Co. He booted Merrill Lynch & Co. and Morgan Stanley, and invested the money into Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc.

Today's portfolio is very diversified, says Govil. He attributes RS Core Equity's turnaround to his system for selecting what he calls "toll keepers", "superior executors" and "future core companies."

Toll keepers are companies that have become virtual standards in their industries, Govil says. MasterCard Inc., currently among the fund's top three holdings, is one example. The firm was previously owned by a consortium of banks, and was never managed to its full profit potential, he says.

Superior executors are companies that are consistently among the top earners. Among the superior executors he holds are Goldman Sachs and Accenture Ltd.

Among his future core companies, which he calls "the stars of tomorrow," is Google Inc. He expects it to deliver returns for the next five to 10 years as Internet advertising expands.

When evaluating a company, Govil and his team of analysts meet with company executives, competitors, customers and suppliers. They consider such fundamental factors as price-earnings ratio, price-to-book ratio, discounted cash flow and return on investment capital. But Govil cautions that "a company should look attractive on all valuation metrics, not just one."

Govil will sell a stock when it hits its price target or when all good possibilities are priced in. He sold shares of Lehman when it hit his price target in March 2006, and invested the proceeds into Goldman Sachs. To manage risk, he will sell a stock if its weight in the portfolio edges too high.

Copyright 2007 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed

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