Fidelity Focused Stock (FTQGX) has been a very strong performer. Stephen DuFour has managed Fidelity...
A Balanced Fund for All Seasons
08/08/2011 7:30 am EST
When things get this crazy, it pays to have some balance in your portfolio, notes John Bishop of Investing Daily.
In the rush for profits, many lose sight of the first rule of investing: Don’t lose money.
This deceptively simple philosophy is the cornerstone for investors seeking both capital appreciation and income. It also describes the raison d’etre for Weitz Balanced (WBALX).
“Our approach is always safety first,” portfolio manager Brad Hinton said. “Make sure the downside is protected, and the upside will take care of itself over time.”
In 2008, the fund suffered along with its peers in the Morningstar moderate-allocation category, declining 26.8%, though this performance topped the category by 1.2%.
Weitz returned to form in 2009, gaining 28.8% and topping its category by 4.6%. The fund’s 15.7% return in 2010 launched Weitz Balanced into the top 4% of its category.
Although the fund has endured some rough years since its inception, it appears to be gathering momentum. Weitz Balanced ranks in the 71st percentile among its peers for the trailing five-year period. But the trailing three-year period has seen the fund climb to the top 3% of its category.
This performance has been achieved by hewing to a conservative fixed-income strategy and careful bottom-up selection of stalwart equity names.
This prudence is evident in management’s stewardship of the fund’s fixed-income sleeve. While the fund opportunistically snatched up high-yielding corporate bonds amid the financial crisis, Weitz Balanced sold off almost all of its high-yielding issues in the first quarter.
The fund’s cash holdings hover around 24% of investable assets, a result of what management views as a dearth of opportunities in the fixed-income universe. More recently, the fund has sought opportunities in floating-rate bonds, believing that interest rates will eventually rise.
At the height of the financial crisis, management was willing to bet on companies sporting less-than-pristine balance sheets. Shares of Liberty Interactive (LINTA), which operates the QVC home shopping channel, were battered in 2008, as market watchers feared the company’s mounting debt and an uncertain outlook for QVC.
Management picked up the stock while it traded around $3. QVC proved resilient, and Liberty Interactive’s stock now trades around $16.
Although opportunistic bets such as this paid off for the fund, management has since gravitated toward well-capitalized firms with rock-solid balance sheets, and stalwart blue chips such as Accenture (ACN), Wal-Mart Stores (WMT) and United Parcel Service (UPS).
“That’s been the biggest change,” Hinton said. “We’ve always had a focus on business quality, but we’ve been moving even more heavily into the companies with strong balance sheets and cash flows.”
The fund has also held fast to long-term holdings such as Laboratory Corp of America (LH), which provides independent laboratory testing services to more than 220,000 hospitals, managed care facilities, physicians offices, and biotech and pharmaceutical outfits. The company operates in a market duopoly and has snatched business from smaller companies and in-house laboratories.
Management established a position in the stock at the fund’s inception in 2003, when shares traded around $30. Although the firm’s share price has risen to around $94, Hinton believes the stock remains attractively valued.
Nevertheless, the fund’s portfolio features under-appreciated names that management believes are worth the risk.
Weitz Balanced established a position in Phoenix-based for-profit university Grand Canyon Education (LOPE) in late 2009, and has stuck with the company despite a 26% loss in the last quarter. The for-profit education sector has seen enrollment drop as regulators and the media have questioned universities’ recruiting practices.
But management believes Grand Canyon will benefit from a powerful trend. US workers increasingly need more education to find work in a competitive work environment. These older, non-traditional students are poorly served by non-profit universities and community colleges.
Grand Canyon’s specialty in nursing and education—about three quarters of enrollment comes from these fields—combined with its relatively cheap tuition and high number of graduate degree-seeking students puts it in a class of its own.
It remains to be seen whether Hinton’s conviction in Grand Canyon will pay off. But these occasional measured risks have helped this conservative fund build a track record of success.
Related Articles on FUNDS
I think we’re finally seeing the bottom forming in MLPs, which is good news for JPMorgan Aleri...
When we recommended large-blend Parnassus Core Equity Fund (PRBLX) a year ago, what stood out most w...
On November 1, we featured Doug Hughes' recommendation for investment banking firm Oppenheimer Holdi...