Investors often ask me how to build a portfolio that holds its own in down times but hands them soli...
A Defensive Fund for Chilly Times
11/23/2011 9:15 am EST
This fund shows that focused investing doesn’t require extreme volatility, says Kathryn Young of Morningstar FundInvestor.
Pat English, the firm’s CIO, and Andy Ramer, director of research, lead the effort on FMI Large Cap (FMIHX), but they are only part of a nine-person management team that’s structured to foster collaboration and healthy debate.
The team, which includes the firm’s six other analysts, collaboratively works to research stocks, debate the merits of those that pass the tests for inclusion in the portfolio, and, ultimately, decide on buys and sells.
English and CEO Ted Kellner have been the fund’s named managers since its inception, but the firm’s other analysts were officially added in 2009. All of the managers are generalists, meaning they research stocks across sectors and industries.
English says that eliminates the tendency for sector-dedicated analysts to become wedded to their domain. This structure bodes well for the repeatability of the firm’s process and protects fund shareholders from risks related to the loss of any team member.
Management seeks firms with a clear and sensible business model that generate recurring revenues, a defensible market position, and topnotch management.
Accenture (ACN) has been a longtime favorite because it’s the leader in tech consulting, a service with consistent demand fed by continuous tech upgrades. Its lengthy contracts with clients help mitigate revenue cyclicality.
Valuation serves as a key driver of the process. The team measures a stock’s price in a variety of ways, including relative to its history and relative to the firm’s book value and earnings. The group builds positions when it thinks the price is attractive on those measures and trims as it becomes less so.
Schlumberger (SLB), for example, has come in and out of the portfolio based on valuation. The managers like the firm’s powerful presence in a business where its unique expertise allows it to extract higher prices from customers.
They previously sold the stock after it topped $90 a share, but recently bought it again after it dropped below $70. Morningstar analysts give the stock four stars, indicating that it is somewhat cheap.
The managers’ strict adherence to this process leads to a concentrated portfolio. Names from the industrials sector typically comprise a large portion of the fund’s assets, because the nature of their business often lines up well with the managers’ preferences.
The fund has consistently held up better than the majority of peers during tough markets. Its 15% slide in 2002 was better than 95% of peers. And its 27% loss in 2008, though painful, was 11 percentage points less than the average large-blend fund.
The fund has also proved flexible enough to keep up in rallies. As a result, its 8.2% cumulative gain from inception through October 31 crushes the 2.8% gain for the S&P 500.
The managers’ tenure and fund ownership demonstrate their commitment to fund shareholders. On average, they’ve been with the firm 12 years, and they invest their entire net worth in the firm’s funds and shares of the advisor, Fiduciary Management, which is 100% employee-owned.
Their willingness to close funds—FMI Common Stock (FMIMX) closed to new investors for the second time in December 2009—proves that they take shareholders’ interests to heart.
A 0.97% levy is average for a no-load, large-cap fund. Costs have dropped as assets have grown.
A relatively defensive profile, stable management team, repeatable process, and proven record make this fund an excellent choice for investors seeking something reliable amid uncertain markets.
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