A Fund for All Seasons

12/28/2011 8:30 am EST

Focus: FUNDS

Here's a four-star fund that has a great risk-reward profile for long-term investors, writes Katie Rushkewicz Reichart of Morningstar FundInvestor.

Perkins Mid Cap Value T (JMCVX) is doing what it should. Although macroeconomic issues have grabbed headlines and incited plenty of market volatility lately, this fund has stuck with what it does best: buying financially healthy companies when they appear undervalued and not letting market sentiment get in the way.

In fact, market volatility that began in mid-2011 gave managers Tom Perkins and Jeff Kautz the chance to add to struggling names like Ameriprise (AMP), First Niagara Financial Group (FNFG), and PNC Financial Services (PNC). Although the fund has an underweighting in financials relative to the Russell Mid Cap Value Index, the managers have narrowed the gap a bit, saying that many look well capitalized.

Still, don't expect the fund (currently closed to direct retail investors) to mimic the benchmark's weightings. The team's quality bias means certain sectors simply aren't appealing, including utilities, a traditional value investor haven. Government regulation and the leveraged nature of the business mean these companies aren't a good fit for the strategy, resulting in a persistent underweighting relative to the index, which has a nearly 14% stake.

While this process might not please benchmark-oriented enthusiasts, it's worked wonders for fund shareholders. The emphasis on high-quality companies has curbed volatility, particularly in down markets.

Indeed, the fund lost less than its peers and benchmark during the previous decade's bear markets, and it's also proved more resilient during 2011's market turbulence. That behavior has made the fund easier for investors to own.

In fact, the fund's dollar-weighted returns, which measure the experience of a typical investor, are quite good relative to its total returns. The fund's enviable long-term track record, reasonable fees, and consistent management team continue to make a strong case for it.

Perkins' value-conscious investment approach spans the shop's lineup, but this isn't a deep-value fund. The managers don't buy stocks just because they look cheap, and they avoid dicey fare, analyzing the potential for loss before considering possible gains.

Portfolio candidates must have strong free cash flows, reasonable debt levels, and healthy balance sheets. And while the firm's managers make the final decisions, they collaborate with sector analysts, thoroughly vetting stocks before adding them to the portfolio.

The fund's average market cap has ranged from $6 billion to $9 billion the past few years, higher than that of the Russell Mid Cap Value Index and many peers.

As the category's largest fund, it's less able than rivals to take meaningful positions in the smaller-cap stocks, but the managers have recently found more value in larger-cap names. The managers maintain a well-diversified portfolio of more than 150 stocks, with position sizes typically under 2%, reducing the risk that any one stock will significantly affect results.

Given the team's valuation discipline, sector weightings can look quite different from the Russell Mid Cap Value Index. The team lets cash build when valuations aren't compelling, too, occasionally allowing it to reach double digits.

As small-cap valuations have run-up, the managers have found attractive risk-reward opportunities among large-cap companies with cash-heavy balance sheets and competitive market positions. The fund's large-cap stake has increased the past few years as its small-cap stake has decreased.

Fallen growth stocks that would have been out of reach a decade ago, including Microsoft (MSFT), Cisco (CSCO), and Intel (INTC), now appear in the portfolio, as they sport many of the quality-oriented characteristics the managers require.

As of August 31, the fund held around 9% cash, which isn't unusual given that the managers like to keep some powder dry in case market dips present buying opportunities. However, the managers are opportunistic and have been almost fully invested at times, including when valuations were near historic lows in early 2009.The health-care and technology sectors are well represented in the portfolio.

Within health-care, the managers favor medical-device companies with strong free cash flows and attractive P/Es. Meanwhile, the fund's financial exposure falls below the Russell Mid Cap Value Index's, largely because of a lack of compelling opportunities in REITs. The fund is also typically light on utilities, as regulation and leveraged balance sheets dim their appeal.

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Related Reading:

Let's Rate 12 Top Big-Value Funds
2 Closed-End Funds for Total Return
A Fund for Emerging Asian Opportunities

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