Ferreting Out Undervalued Large Caps

05/16/2012 7:00 am EST

Focus: FUNDS

The Aston/Herndon Large Cap Value Fund (AHRNX) focuses on Russell 1000 stocks trading at a discount relative to their fundamentals. Manager Randy Cain tells MoneyShow about his methodology, and why he believes the fund makes sense for investors seeking dynamic large-cap exposure.

Kate Stalter: Today’s guest is Randy Cain, manager of the Aston/Herndon Large Cap Value Fund. Randy, can you begin today by describing for us what the fund’s investment philosophy and objectives are?

Randy Cain: Absolutely. This fund is a large-cap value strategy, utilizing the Russell 1000 as the investment universe. Our focus is on making sure the portfolio is populated with what we call “value-creating opportunities.”

Each one of those words is very instructive on what we are actually trying to accomplish for our clients. The first word, “value,” means that we are looking for stocks to have a minimum of 30% or more upside, according to our own proprietary way of looking at valuation.

The second aspect, in terms of “creating,” is that we are not looking for companies on a basis of break-up value. We basically focus on companies that have operating ongoing concerns, are already functioning in a fashion that we would deem to be acceptable, but that the market is not recognizing how productive the companies actually are.

Then the last word, “opportunities,” really helps to highlight the fact the three things we cannot control or do, and that is predict or manage the timing, duration, or magnitude of our performance. All that we can do is position ourselves to achieve it, recognizing that in the short term, the market is going to go up and down, based off of its reaction to short-term information, but longer term our expectation is the fundamentals juxtaposed against evaluation should win out.

Kate Stalter: Before we began recording today, I mentioned that I have spoken previously with a couple of the managers over at Aston. Can you talk a little bit about the sub-advisory model, and how your funds fit into that?

Randy Cain: Herndon Capital Management is an institutional money management firm that really does not have the marketing and distribution infrastructure in place to support a more retail-oriented type of relationship.

So when we had the opportunity to partner with Aston, it really fit perfectly with the model that we have in place, which is that we focus on producing institutional investment products, but we will partner and allow our product to be distributed in channels in a wide variety of ways.

So Aston, through a nationwide coverage of wholesalers, gives the opportunity to reach out to the retail marketplace in the fashion that we could not do on our own, and so it really is somewhat of a perfect marriage between what Aston already has from a marketing infrastructure, and what we are doing from an investment product management standpoint.

|pagebreak|

Kate Stalter: Let me turn to the investment in the funds then itself, Randy. How do you balance dividends and price appreciation when it comes to the total return that you’re seeking?

Randy Cain: When you look at our fund, one of the things that you will see right now is that characteristic, that we have a dividend yield that is in excess of that of the Russell 1000 value.

But dividend as a focus is not really a concentrated effort, or main part of our portfolio approach. Instead, it tends to be more of a part of the process. So the actual yield, payout ratios, and what have you, are not something that we are really that focused upon.

Instead, capital appreciation first is our main mantra. But we do consider dividends, but it’s not something that would keep a stock from being a part of the portfolio, if a dividend was absent.

Kate Stalter: I was also looking at some of the holdings on Morningstar, where they had some of your top holdings listed as of the last quarter. One I noticed was the airline Copa (CPA), which falls more in the mid-cap range. And that got me curious about your asset allocation when it comes to market cap, given that it is a large-cap value fund.

Randy Cain: Absolutely. Well that is something that actually raises the interest level of many potential investors and their strategy at the institutional level, as well as the individual level.

We utilize the Russell 1000 as our investment universe, and that goes from companies of the mega-cap group, which you would also see in the portfolio—such as ExxonMobil (XOM), Apple (AAPL), and Microsoft (MSFT) and IBM (IBM)—all the way down to companies with market capitalizations in the $1 billion or so range.

We utilize that whole universe as we consider opportunities, not segmenting the amount on the basis of whether we think they are large caps or mid cap. If there wasn’t a Russell 1000, these are companies that we would actually consider. Copa actually fits in that focus, because it is within the Russell 1000.

But also, although the bulk of the operations are in Latin America, it still is not an ADR-considered company; it is a Russell 1000 company. So unlike many of the airlines that have challenges as far as capacity and growth, they happen to be a growing market.

In our opinion, the fundamentals are far superior to what the current price reflects in terms of valuation, and so for us, it meant a value-creating opportunity. After doing the fundamental analysis on it, it made its way into the portfolio.

Kate Stalter: You just went through, in quickly listing there while you were talking about Copa, some of the other holdings. And you did indicate that these are based on the Russell 1000 index. Given that, how often do you make new buy or sell decisions? How often do you trade in and out of the fund?

Randy Cain: Well, I think that what is much more relevant in looking at that, and not to be evasive of your question, but the activity that actually takes place is a result of managing the portfolio. And it’s actively managed, and we actually revisit the portfolio on a weekly basis.

The visiting of the portfolio on a weekly basis may or may not result in an actual trade taking place. But the process of looking at it to see if we need to add, say, to a particular sector, take something away, if a particular holding has gotten to a size where it needs to be trimmed, or got to a valuation level where it may not need to be a part of the portfolio any longer—all of those things are considered.

The turnover since inception has been about 65% within the portfolio. So on average, you are looking at us holding stocks about a year and a half or so.

Kate Stalter: Let me just wrap up today by asking you: Where do you believe that this fund fits in with an investor’s overall portfolio, given that they might be looking at growth, fixed income, managed futures—all of these various other asset classes...how would this fund fit?

Randy Cain: Well, our approach, as it is categorized by many, is considered to be relative value. With that said, that means that we are going to be looking at companies across a whole spectrum of opportunities, regardless of market capitalization, sector, or industry, as long as it’s within the Russell 1000.

So I think that we tend to be a bit more broad-minded in how we categorize value. But it is very much a value approach, in that we’re purchasing companies at a discount to what their fundamentals should actually bear.

So, in my opinion, for investors who are looking for large-cap exposure, that is going to be flexible and dynamic and take advantage of the opportunities as they change in the market, I think that our fund actually is one that they should look at, because I think it could be attractive and value-added.

Related Articles on FUNDS

Keyword Image
Is a Bottom Forming for MLPs?
11/27/2017 5:00 am EST

I think we’re finally seeing the bottom forming in MLPs, which is good news for JPMorgan Aleri...

Keyword Image
Takeover at Oppenheimer?
11/15/2017 3:58 am EST

On November 1, we featured Doug Hughes' recommendation for investment banking firm Oppenheimer Holdi...