USAA Capital Growth Has Global Eyes

The same goes for a stock portfolio, at least in the eyes of Michael McElroy.

The portfolio manager of the USAA Capital Growth Fund (NASDAQ: - ) is quick to move in and out of stock positions. But it's all in the name of finding stocks that meet a raft of criteria and are poised to rise.

When a stock falls out of the top one-third of his universe of large-cap stocks, McElroy is quick to bring another stock in off the bench. He sells the fallen stock, with no questions asked.

"We're very sell-discipline oriented," McElroy said. "Every day, we evaluate the portfolio."

The fund turns over about 40% of its holdings each quarter, McElroy says. But its yearly turnover rate has topped 200% in each of the past two years.

Buy discipline also plays a huge role. The fund mixes fundamental and quantitative measures to come up with a portfolio. It looks at earnings growth, cash flow, price momentum and future growth expectations. It also eyes value traits, such as earnings yield and price-to-book value.

McElroy judges the numbers not just against a stock's peers, but against the rest of the market. That, he says, helps set the fund apart from the crowd. If a stock's earnings grow at 15% but the group is growing at 14%, that is not a standout.

Future earnings growth plays a big role. The fund's average holding features a two-year earnings view that calls for 15.2% growth. Its benchmark index has growth prospects of 12.5%.

The fund holds more than 200 stocks at any one time. That helps spread the risk, McElroy says.

"We really believe in strong risk control," he said.

McElroy considers a universe of about 2,500 stocks. Those are names that have at least $2 billion in stock available for public trading, analyst coverage and an operating history of at least a year.

Going Global

He'll buy global stocks as often or more often than U.S. names. The fund started a go-anywhere strategy in late 2005, and McElroy and his team take advantage of that.

"We look for opportunities wherever we can find them," McElroy said.

Their criteria tend to lead them to focus on certain regions. The fund stacks up its results against the MSCI All-World Index.

Just more than one-third of the fund is in U.S. stocks. That's below the index's makeup, McElroy says. Developed foreign markets make up almost half of the fund's holdings.

Emerging markets have fueled the fund's gains lately. While about 10% of the index is in emerging markets, the fund has about 18% in that sector, McElroy says.

"Our exposure in emerging markets has really driven the recent performance," he said.

Strong results are nothing new for USAA Capital Growth. Going into Thursday, it was up 19.46% this year vs. 10.57% for large blend funds tracked by Morningstar and 10.25% for the S&P 500.

It's on the way to beating both measures for a fifth straight year. Its five-year annual return of 23.25% is far ahead of its peers' 13.58% and the S&P 500's 14.93.

Among the top U.S.-traded holdings as of the fund's latest reporting period was Companhia Vale do Rio Doce (NYSE: - ). The Brazilian miner has been on a fundamental tear, propelled by strong global economic expansion.

Double Growth

Earnings and sales at least doubled in the past two quarters. Analysts see Q3 EPS up 42%. The stock is up 137% this year.

Oil and gas provider Petro-Canada (NYSE: - ) has been in and out of the fund in recent months, but it's now back in.

McElroy likes its earnings profile and momentum, as well as expectations.

The stock has surged more than 50% since the beginning of March. Analysts expect 47% earnings growth in the December quarter.