These portfolio managers have sound strategy for growth

Investment manager Fred Martin has proved prescient about recent tumult in the stock market.

Together with his 15-person staff, Martin, the chief investment officer and principal owner of Disciplined Growth Investors, directs the investment of $1.4 billion of their own dough and that of 145 other individual and institutional clients. The largest batch is in a portfolio of midsize companies that have outperformed the Russell Mid Cap Growth index by a long shot over the past year, five years and decade.

In something of a proxy for the times, Disciplined Growth just bought some like-new furniture and computers for cents on the dollar from imploded Deephaven Capital, the leveraged hedge fund that went from the rage to enraging well-heeled local investors who pulled out in droves in 2008-09.

Martin, 63, doesn't profess to be smart enough to forecast global financial hurricanes or the future value of the dollar or market volatility.

He just likes to own good companies with strong balance sheets and a competitive advantage.

"We don't rent stocks, we own them," Martin told several dozen of his investors the other night, a reference to DGI's low investment-turnover rate compared with the industry average. "I've either outlasted everybody else or I was too dumb to quit."

Martin and company were smart enough to get nervous about all the capital flowing to the financial and housing sectors in 2004-06. They largely pulled away from the lenders and builders and minimized the bath to investors during the housing-finance contraction of 2007-09.

"If we don't understand it, we don't buy it," said Martin, recalling a DGI publication in 2004 that panned the likes of Citigroup and Fannie Mae, among the most aggressive players with the highest-compensated brass who are now basically wards of the government.

DGI's mid-cap equity composite portfolio rose 5 percent between October 2008 and September 2009. And it has nearly doubled since the market bottomed in March, compared with a 65 percent and 72 percent improvement in the S&P 500 and Nasdaq markets, respectively.

DGI's largest winners include TJX Companies, the holding company for several discount retailers; Plexus Corp., the Wisconsin-based contract manufacturer; and Adobe Systems, the California-based global software designer and another company that has doubled in value since March.

Martin said a year ago, as stocks and investor worth plunged, that we were in "a once-in-a-lifetime buying opportunity." He's right so far.

Now investors worry about rebounding "too far too fast" this year.

Worried about federal budget deficits, a declining dollar, inflation? So is Martin. He told investors to align their equity holdings with risk tolerance and their ability to sleep at night.

"But we can have a sour outlook on the economy and still feel good about our stocks," Martin said. "Stocks give some inflation protection."