A Different Take on Value

12/08/2006 12:00 am EST


Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Always searching for profitable niches for his subscribers, fund pro Dan Wiener recommends a mutual fund that looks at 'value' from a unique point of view, casting aside traditional ratios for a more comprehensive evaluation.

"U.S. Value (VUVLX )'s low-risk strategy may not look so attractive when the stock market is on a tear to the upside, but over a full market cycle it's worked quite nicely. " Manager Sam Wilderman of Grantham, Mayo, Van Otterloo (GMO) divides U.S. Value's portfolio into three subportfolios, which use different computer models to screen for likely purchase candidates. The concept is to blend growth and value characteristics in the fund so that it won't suffer when one style is out of favor.

"The idea here is to look for compa ­nies that have "intrinsic value" based primarily on the profitability of their operations. Companies fitting this mold may in fact be richly valued by tradi­tional measures like price-earnings but undervalued based on GMO's defini­tion of intrinsic "worth." These compa­nies represent about half the portfolio, and 30% of the portfolio is invested based on more traditional measures of value. They call it "normalized earnings." But for you and me it's a reflection of their belief that accounting changes have fundamentally flawed the price-earnings and price-book value measures of old. The last 20% of the portfolio is invested in companies whose stocks are showing good price momentum.

"It's hard to categorize this fund as large-cap or mid-cap given that the man­agers have the flexibility to range far and wide--and do so. The portfolio's median-sized company has dropped to under $9 billion in the past but has been steadily growing as comput­ers have found more and more value amongst the market's largest companies. The median company now has a market cap of $56 billion, just slightly smaller than the companies in the S&P 500 index. The fund may hold 330 stocks, but one-third of the fund's assets are invested in its ten largest holdings (a nice bit of concentration in my book), with Pfizer, Citigroup, Verizon, and Merck topping the list. As these names imply, the managers see value in these hereto­fore underperforming stocks.

"Sometimes U.S. Value's strategy hits on all cylinders while other times it simply meanders along. It seldom, if ever, really stumbles. Earlier this year I recommended a move from Windsor II, which I saw as becoming too bloated with too many cooks in its kitchen, to U.S. Value. Since that move, U.S. Value has underperformed by 1.3%, hardly a big difference, but one I expect the managers to more than make up over the course of the next year."

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