Generally, balanced funds stick to a relatively fixed proportion of stocks and bonds but may also ha...
7 Funds that Specialize in Turnarounds
07/31/2019 5:00 am EST
Part of what makes turnarounds an inefficient and therefore profitable investing niche is that most investors avoid these securities. A rough gauge: of the 3,202 domestic equity mutual funds, perhaps only 15-20 can reasonably be defined as focusing on turnarounds, notes George Putnam, editor of The Turnaround Letter.
Managers of this small group of funds are comfortable with the contrarian approach of owning stocks that are avoided by more conventional mutual fund managers.
In many cases, they look for catalysts that may return the company to favor, or they may simply buy stable companies that are highly discounted or have complicated stories. In other words, their strategies are similar to how we pick stocks.
We thought it might be interesting to our readers to look at some of these turnaround-oriented mutual funds. Not only do their strategies have appeal as diversified investments, but also their websites often offer insights into their thinking and processes.
Listed below are seven funds that we’ve watched over the years. Each one has a slightly different variation on the theme, and so prospective investors will want to familiarize themselves with each prior to selecting those that most closely fit their interests.
Some have had weak performance – not surprising in the late, tech-stock-driven stages of a near record-long bull market. However, when the market turns against mainstream stocks, these funds that go against the crowd can shine.
AMG Managers Skyline Special Equities (SKSEX)
This fund looks for companies that have one or more of the following characteristics: below-market average price/earnings ratios but above average earnings growth, problems that will likely reverse or special circumstances that could lead to strong appreciation potential.
Turnover is a low 24%. While the fund’s long-term performance has been strong, its recent returns have lagged, partly due to its small-cap value bias which itself is out of favor.
Cambiar Opportunity Fund (CAMOX)
Part of the $11 billion Cambiar Investors group, this fund is similar to the company’s original Large Cap Value strategy that looks for catalysts and changes (Cambiar is Spanish for “change”) that will create an inflection point to drive the shares higher.
The fund holds a concentrated roster of 35-45 stocks and has been managed by veteran value investor Brian Barish since 1997.
Driehaus Event Driven Fund (DEVDX)
This aggressive fund is managed like a hedge fund, with a concentrated portfolio of 25-50 positions, a high 1.90% fee ratio, a sizeable number of short-sale positions and a rapid 101% turnover rate. It has earned a four-star rating from Morningstar.
The fund emphasizes special situations companies involved in mergers, spin-offs, restructurings and complex business models. It also invests in risk arbitrage and other opportunities.
About a third of its assets are fixed income, and nearly three-quarters of its positions are in the financial and healthcare sectors. While small in size, it is backed by the $7.6 billion in assets Driehaus Capital Management, which was founded in 1982.
The Fairholme Fund (FAIRX)
Although performance has severely lagged the S&P500 over the past three years, the fund is having a very strong 2019, led by its large positions in St. Joe Paper and preferred shares of Fannie Mae and Freddie Mac.
Its manager, the respected Bruce Berkowitz, is comfortable with well-out-of-consensus positions and staying with them, indicated by the low 16% turnover ratio.
Fidelity Capital and Income Fund (FAGIX)
This high-yield bond fund emphasizes distressed bonds while also holding about 21% of its assets in equities. Among its peers, it has one of the strongest track records, earning it five stars from Morningstar.
The portfolio manager, Mark Notkin, has overseen the fund since 2003. When troubled times arrive again, this fund is likely to find a way to capitalize on the opportunities.
Fidelity Event Driven Opportunities (FARNX)
Launched in late 2013, this fund focuses on companies involved in events such as reorganizations, changes in strategy or management and other corporate actions.
Its current roster of 55 holdings leans toward small and midcap companies with a bias toward tech and consumer discretionary stocks. High turnover (89%) and high fees (1.12%), however, probably contribute to its lackluster performance.
PzenaMidCap Value (PZVMX)
Overseen by veteran value investor Richard Pzena, investors can participate in a strategy that invests in undervalued companies with temporary problems. The fund holds sizeable positions in Turnaround Letter recommended Jeld-Wen Holdings and Newell Brands.
Its current roster is concentrated (only 42 names) and turnover is low (34%). While the MidCap Value mutual fund is small, it is supported by Pzena’s team of 25 research analysts that oversee a total of $35 billion in assets. Readers may also want to check out Pzena’s website as the company is publicly traded and full of interesting market commentary.
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