Two Funds That Thrive on Value

06/25/2008 12:00 am EST

Focus: FUNDS

Thurman Smith

Editor, Equity Fund Outlook

Thurman Smith, editor of Equity Fund Outlook, finds two funds that specialize in value stocks of different sizes but have held up well in this rocky market.

Many of the better small-cap value funds closed in the 2006-2007 period, as incoming investments were greater than the supply of places to invest. One of the better funds, Allianz NFJ Small Cap Value (PNVDX) recently reopened. It was one of five small-value funds that eked out a gain in 2002’s plunging market, and it managed a 6.1% return in 2007, when the credit crisis dragged its typical rival to a 5% loss.

So far this year, the fund’s outperformance has continued; it’s up 2.5% year to date, while the category average is down 1.8%. The management team at subadvisor NFJ Investment Group follows a strict valuation strategy and, for this fund, focuses on dividend-paying stocks. Because dividends impose financial discipline on companies, a dividend-centric approach steers the fund away from cheap, speculative players that may not rebound. And by owning just one or two companies per industry, the fund avoids a heavy concentration in a handful of dividend- rich industries.

The fund is unlikely to perform as well when speculative stocks are flying high; it lost 6% in the 1999 frenzy, for example. But then, keeping out of trouble in downturns and posting respectable gains in more staid environments has led to competitive long-term returns. The fly in the ointment is that small-cap stocks have still not yet rebounded enough to see more than one-sixth of small-cap funds with a Buy rating. It would be reassuring to have more company.

Over its [nearly two years], WHG Large Cap Value I (WHGLX) returned 10.1%, annualized, while the market returned 5.8%. The fund is a clone of GAMCO Westwood Equity (WESWX), which manager Susan Byrne has run since its 1987 inception.

Byrne follows a value-oriented, contrarian style. She made a variety of smart moves that helped the fund avert the subprime fiasco that harmed many of its rivals’ performance. Early in the year, she eliminated positions in brokerages such as Lehman Brothers, Bear Stearns, and Morgan Stanley, each of which went on to deliver losses greater than 20%.

Her insistence on investing in companies with globally diversified revenue streams, like Nike, has largely shielded the fund from concerns over a US slowdown. Another driver of this fund’s performance has been its technology stake, which accounts for 13% of the portfolio, twice its average competitor’s.

Byrne started building positions in software companies more than a year ago, when more software piracy controls were implemented in emerging markets, making it easier for those companies with strong cash flow to grow. Such moves are typical of Byrne’s mix of long-term sector trend analysis and bottom-up fundamental stock research.

The issue with this fund is deciding whether the good showing of both funds in the time both have been around means that Byrne and team have improved, or that performance will regress to the Westwood Equity level.

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