Value investing, the patient contrarian strategy of picking stocks perceived to be trading for less than their intrinsic worth, isn't having an easy 2008.
The usually steady financial stocks that dominate many value portfolios are in disarray; periods of uncertainty typically disrupt the value strategy; and disenchanted investors already hold portfolios packed with deflated value stocks.
Within the value category, large-cap funds are down 14 percent, mid-cap funds down 9 percent and small-cap funds down 5 percent, according to Lipper Inc.
More than a few cynics have proclaimed value investing to be dead. Its plight hasn't been this dire since the height of the tech bubble.
Not only have trends seemingly shifted against it, but there's been poor stock-picking by previously savvy value managers. Many who analyze value measures such as price-to-earnings and price-to book ratios to find bargains seem to have lost their touch.
Have events rendered irrelevant the mantra of luminaries Ben Graham, John Templeton, Warren Buffett and Martin Whitman? Does it make sense to keep buying what appear to be bargains when they keep sliding further in price?
Here's one response: Preston Athey, portfolio manager of the respected T. Rowe Price Small-Cap Value Fund (PRSVX), has lately been thinking about a famous Business Week cover story.
"The Death of Equities: How inflation is destroying the stock market" roared the publication's cover of Aug. 13, 1979.
"I'm reminded of that cover because it appeared around the start of an unbelievable 20-year bull market," chuckled Athey, managing director of that $5.3 billion value fund, which is up about 1 percent this year. "There's no death of value investing either."
Since Athey took charge of the conservative, low-volatility fund in 1991, it has turned in a 14 percent annualized return. It is a "no-load" (no sales charge) fund that requires a $2,500 minimum initial investment and has an annual expense ratio of 0.81 percent.
"One reason my record is not too bad is because I take a somewhat eclectic view of what value is," said Athey, who says too many investors consider a stock selling at 30 times its earnings a value stock simply because it once sold for 50 times earnings. "You have to be nimble and willing to buy stocks in sectors and industries not typical in value screens."
Some unusual holdings in his portfolio are the for-profit education firms Apollo Group Inc. (APOL), DeVry Inc. (DV) and Corinthian Colleges Inc. (COCO), which he considers well-equipped to successfully weather lingering doubts about student loans.
His largest portfolio holdings include Landstar System Inc. (LSTR) and FTI Consulting Inc. (FCN) in business services, plus Penn Virginia Corp. (PVA), Encore Acquisition Co. (EAC) and Tetra Technologies Inc. (TTI) in energy.
Continued... |