The three managers of Akre Focus Retail Class (AKRE) liken their investment process to a “thre...
The Good, The Bad and the Ugly
05/29/2007 12:00 am EST
Thurman Smith, editor of Equity Fund Outlook, identifies some strong fund performers, as well as potential laggards. Hint: The likely losers were among yesterday’s biggest winners.
After a dust-up in the market it is not surprising to see Fairholme (FAIRX) looking good, but this low-risk, large cap, concentrated vehicle is not just another deep value affair. Rather, lead manager Bruce Berkowitz looks for stocks where simple math says it’s hard to lose money and easy to make it.
So he and co-manager Larry Pitskowsky buy, at a big discount to intrinsic value, firms with a durable cash flow, a brawny balance sheet, and great owner-managers. They don’t mind keeping lots of cash while waiting for a good deal; and they also may go for a situation where quality is lacking but the value proposition is immense. The fund’s 18.3% annualized return from its December 29, 1999 start tops all but three mid-blend rivals and crushed the market’s 2.8% return [during that time].
Fairholme is also a low-minimum way to get some Berkshire Hathaway, which is about 17% of assets. Thus it is no surprise that the managers follow a Warren Buffett-style stock-selection approach, and save for a 33% stake in energy suppliers. A lower-risk option with growth potential could be useful in a market retrenchment.
Fourteen-and-a-half years ago Vanguard launched complementary value index and growth index funds. The criterion for dividing stocks into the two camps was the price/earnings ratio of actively traded stocks, realigned semi-annually.
The assumption is that stocks with higher multiples of price to earnings are bid up by earnings-momentum chasers, aka growth investors. The other half must be value investors. Over this time, Vanguard Growth Index (VIGRX) returned the annual equivalent of 9.9% while Vanguard Value Index (VIVAX) returned 12.2%.
This is a long enough period to generalize that value is a better bet over earnings momentum as a selection criteria for core positions.
The sudden deterioration in funds mostly in domestic real estate investment trusts (REITs) was a surprise. Funds based on a particular financial instrument more than the operating fortunes of the firms they hold are subject to some fixed-income market factors, such as rating downgrades and perceptions of the direction interest rates.
Since the REITs involved are not particularly tied to residential markets, perhaps it was just another case of an exceptionally strong part of the market needing a correction. Third Avenue Real Estate Value (TAREX), which is more into operating firms than REITs, held up best among domestic funds in this category.
Another set of fundamentals and a weak dollar make foreign real estate funds still attractive. Alpine International Real Estate (EGLRX) remains the top choice. But domestic real estate funds were the only set of funds held in model portfolios that are lower now than at the bottom in early March. Failure to rebound off a low suggested serious problems; thus the two such funds in the model portfolios were sold.
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