Value Fund Trio

04/18/2014 9:00 am EST

Focus: FUNDS

Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

The three funds profiled here are all led by management teams who refuse to overpay for stocks; their value discipline has been amply rewarded, observes Ari Charney in Personal Finance.

Although the average large-cap value fund has lagged the market over the past decade, each of these three funds managed to beat the market over the last five and ten years.

While these funds can fall behind the market in the short-term, particularly during bullish periods, part of the secret to their long-term outperformance is that they tend to lose less during downturns.

With an aging bull market, that’s an increasingly important consideration. All three are suitable as core holdings.

Vanguard Equity Income (US:VEIPX)

Over the trailing ten years, Vanguard Equity Income gained 8.7% annually, beating the S&P 500 (SPX) by an average of 1.2 percentage points per year.

The fund’s enviable long-term record is due, in part, to the fact that the defensive dividend payers it favors, such as consumer staples stocks, do such a great job of preserving wealth during downturns.

Vanguard divides the fund’s management between outside advisor Wellington Management, which handles about 60% of assets, and the fund giant’s in-house quantitative equity group. Both are seasoned teams, with lead managers that have been at the fund’s helm for six years and ten years, respectively.

The vast majority of the fund’s 163 holdings are US large-cap stocks; portfolio turnover has averaged 30% over the past three years, which is below average compared to its peers.

The fund’s dividend focus means that it pays a quarterly income distribution equivalent to about 2.5% of its net asset value on an annualized basis. As such, it’s best suited to tax-advantaged accounts, such as IRAs. VEIPX charges a rock-bottom annual expense ratio of 0.3%.

Homestead Value (US:HOVLX)

Homestead Value’s management team boasts true longevity: Two of its three managers have been running the fund for nearly a quarter century, while the third has been with the team for 15 years.

Homestead largely eschews glitzy marketing, letting this fund’s performance speak for itself. Over the last ten years, HOVLX gained 8.5% annually, outpacing the S&P 500 by an average of 1 percentage point per year.

Management applies a classic value strategy to mid- and large-cap companies, with the latter dominating the portfolio, at more than 70% of assets. They seek beaten-down names that have solid fundamentals and a potential catalyst for a turnaround.

It can take time for the fund’s holdings to realize their full potential. Indeed, portfolio turnover has averaged only 3% over the past three years. The fund’s concentrated portfolio of 45 names includes outsize bets on the healthcare and industrial sector.

HOVLX charges a low annual expense ratio of 0.68% and requires an initial minimum investment of $500 for taxable accounts and $200 for IRAs.

Oakmark (US:OAKMX)

Of the three funds profiled here, Oakmark boasts the strongest returns over virtually all medium- and long-term time periods since 2000. It has gained 8.9% annually over the past ten years, beating the market by an average of 1.4 percentage points per year.

The fund has similarly trounced the S&P 500 over a number of shorter-term periods as well, earning a ranking in the top 1% of Morningstar’s large-cap blend category over the trailing three-year period, for instance.

Oakmark is led by legendary value investor Bill Nygren, who’s managed the fund for more than 14 years alongside co-manager Kevin Grant. They look for fundamentally strong companies that trade at steep discounts to their estimate of intrinsic value.

The fund holds just 55 stocks. Among its sector bets is a sizable stake in financials, recently at 29% of assets, a weighting nearly double that of the fund’s benchmark.

As with the other funds, management has a longer investment time horizon than many of its peers, with portfolio turnover averaging 21% over the past three years. Oakmark charges an annual expense ratio of 0.95%.

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