Saul Pannell will consider almost any stock for the Hartford Capital Appreciation Fund he manages, a style that has helped him over the past five years outperform 88 percent of mutual funds he competes against.
Pannell's picks this year for the $9.3 billion fund include French drugmaker Sanofi-Aventis SA, a bet on the growth prospect for its Acomplia obesity drug, and Yum Brands Inc., whose restaurant chains KFC and Pizza Hut are expanding in China.
"This is a fund that can by design go absolutely anywhere," Pannell said in a July 18 interview from his office in Boston. "The basic approach is not to be stuck in a box."
He targets stocks he thinks will climb 25 percent in the next 12 months, and is increasingly roaming beyond the United States to find them. About 30 percent of the portfolio is invested in non-U.S. companies, compared with about 27 percent at the end of last year.
Pannell's selections generated an average annual return of 20 percent over three years, compared with a gain of 14 percent for comparable funds that focus on stocks with above-average earnings gains. The fund averaged a 3.9 percent return over the past five years, ranking 22 among 177 funds, according to Bloomberg data. The biggest gainer in the group over five years was Fidelity Low-Priced Stock Fund, which averaged 18 percent.
Pannell, 54, has managed the fund since 1996, though he began running an annuity version in 1991. He has worked at Wellington Management Co., which sub-advises the fund for insurer Hartford Financial Services Group Inc., for 31 years.
Pannell has gravitated toward large-capitalization stocks as assets have ballooned from $2.7 billion five years ago. Companies with more than $10 billion in market value made up about 78 percent of the portfolio at the end of June.
That's a change from smaller growth stocks when the fund was smaller. It's a transition that has tripped up other managers, according to Morningstar Inc. analyst Todd Trubey.
"Oftentimes that is a formula for decay, but Pannell has been able to make that work," Trubey said.
He attributed part of the fund's success to better research at Wellington, which has 45 industry analysts.
Pannell earned a master of business administration and an undergraduate degree in economics from Harvard University, working as a janitor on campus and then as a letter carrier in his home town of Lynn, Mass., to pay for school. His mail route took him past a PaineWebber office, where he paused to read financial magazines and talk stocks with the brokers.
Those visits during the bear market of 1973-74 inspired his first stock purchase, General Cinema, now part of AMC Entertainment Inc. He figured that even in a recession, people would go to the movies. The share price doubled in four months, and Pannell was hooked on investing.
Diversified financial services firms such as Citigroup Inc. represented the largest weighting in the portfolio as of April 30, followed by oil and gas companies including Devon Energy Corp. Pannell says the weightings are a byproduct of picking individual stocks, not broad sector calls.
"It's really betting on specific situations," he said.
These days, Pannell is finding promising opportunities in drugmakers, which accounted for 6.6 percent of his holdings at the end of April.
Sanofi, Europe's No. 2 drug company, is hoping for U.S. approval of Acomplia next year. Pannell expects it to be a blockbuster, given the lack of similar treatments and the large target population. In the United States, 64 percent of adults 20 and older are overweight, according to the National Center for Health Statistics. Shares of Paris-based Sanofi have climbed about 18 percent this year. Its American Depositary Shares closed Friday at $43.80 each.
Pannell also likes U.S. drugmakers, which he expects to recover from the drag of patent lawsuits.
"The large-cap drug companies are very, very cheap," he said.
He held stakes in Eli Lilly & Co. and Forest Laboratories Inc. as of April 30, and said on July 18 that he was buying stock in a large U.S. drug company "very aggressively."
International exposure played into Pannell's purchase of Yum Brands shares in the second quarter. The Louisville, Ky., company, which also owns the Taco Bell chain, expects to open 375 restaurants in China this year and a similar number in 2006. The company gets about 36 percent of its sales from outside the United States. The shares have gained 9.4 percent since April 30 and ended the week at $50.89.
The fund's top holding is South Korea's Samsung Electronics Co., which has advanced 27 percent in 2005. Pannell points to the company's strength in mobile-phone handsets, semiconductors and liquid-crystal display screens for electronics.
Burned by Russian oil company Yukos, Pannell says he often has a better memory for the bets that didn't work out, including stakes in WorldCom Inc. and Adelphia Communications Corp. On the international side, he counts Yukos as one of his best and worst picks of the past five years. He bought American shares of Yukos in 2001 at about $11 and quadrupled his money as the company expanded.
Pannell bought more shares even after chief executive Mikhail Khodorkovsky was arrested. A trip to Russia during which he met "everyone in the government except Putin" convinced him the government would find a solution to the conflict.
"Maybe if I'd met Putin I wouldn't have bought the stock again," he said.