The managers of the Legg Mason Capital Management Opportunity Trust, the Delafield Fund and the Artisan International Small Cap fund will invest in any industry where they find undervalued shares. Another trait they share is long tenure. The lead managers of all three have overseen them since inception — more than a decade in each case.
Gains From Housing
William H. Miller, manager of the Legg Mason Capital Management Opportunity Trust, made his reputation by beating the Standard Poor’s 500-stock index for 15 consecutive calendar years, ending with 2005, while he was managing Legg Mason’s Capital Management Value Trust. He handed off that fund to a colleague in 2011 — but has continued to oversee the Opportunity Trust, which he started in 2000.
Since 2008, Samantha M. McLemore has been the fund’s assistant manager. Mr. Miller declined to comment for this article.
The two managers are willing to bet big if they like a stock or sector. In recent years, they loaded up on companies that might benefit from a housing recovery. Their second-largest holding at the end of November was PulteGroup, the home construction company. In fact, homebuilders and financial companies accounted for 6 of their top 10 picks, or about a fifth of the portfolio.
In fall 2011, “the homebuilders were trading below their financial-crisis prices,” Ms. McLemore said. “Yet there was clear evidence a recovery had started.” Several studies showed that the United States was not building enough homes to keep up with population growth, she said. Pulte’s recent returns suggest that other investors also expect a housing revival: the shares rose nearly 200 percent in 2012.
Another holding, Bank of America, had been bogged down by problem mortgages and concerns about regulatory action. It “spent all of the past year or so trying to get capital levels up, and earnings power was depressed,” she said, adding that it’s now fat with capital and refocused on trying to plump profits.
Last Monday, the bank sold about 20 percent of its loan servicing business as part of its agreement to pay Fannie Mae more than $11 billion to settle a dispute about bad mortgages. The same day, it was among 10 major lenders in an $8.5 billion settlement with federal regulators to resolve claims of foreclosure abuses. “The settlements are consistent with B. of A.’s efforts to put legacy issues behind it and decrease associated costs, which should help earnings growth,” Ms. McLemore said.
The I shares of the Opportunity Trust, with an expense ratio of 1.67 percent, had a 12 percent return for the quarter, versus a loss of 0.4 percent for the S. P. 500.
The fund’s huge gain made it a double champion. Its performance led all United States general stock funds in the quarter — but also for the year, with a return of just over 41 percent.
Turnarounds and Tenure
Like the managers of Opportunity Trust, J. Dennis Delafield and Vincent Sellecchia of the Delafield Fund aren’t afraid to buy into companies that have had hard times. They often seek companies that have had problems but also have catalysts for a turnaround.
“We’re looking for misunderstood companies,” Mr. Sellecchia said. “We want something that will allow the company to change for the positive, like new management, a divestiture of marginal operations, or a significant acquisition.”
When Delafield began buying what was then known as Stanley Works, the company had repeatedly missed quarterly earnings targets, Mr. Sellecchia said. The fund first bought the stock in 2003, expecting a management change. After that happened in 2004, earnings and cash flow improved, he said. “That allowed them to acquire Black Decker,” Mr. Sellecchia said. The resulting company, Stanley Black Decker, was the fund’s sixth-largest holding at the end of November. Mr. Delafield and Mr. Sellecchia differ from some stock managers in that they like to husband cash, letting the reserve swell when they can’t find investments they like. Cash was 20 percent of the portfolio at the end of September. “That’s about as high as we’re comfortable,” Mr. Delafield said.
They have also distinguished themselves with their endurance, having steered their fund since starting it 20 years ago and having worked together for more than 30 years. The average tenure of stock fund managers tracked by Morningstar is about five and a half years.
The Delafield fund, with an expense ratio of 1.25 percent, returned 8.3 percent in the quarter.
Seeking Strong Brands
Mark L. Yockey of Artisan International Small Cap fund specializes more than the managers at Opportunity Trust or Delafield. By charter, he can buy shares only in companies with market capitalizations of less than $4 billion when he invests. Beyond that, he said, he looks anywhere he can find strong brands and high market shares.
One of the fund’s holdings, L’Occitane International, the cosmetics seller, exemplifies a theme in Mr. Yockey’s portfolio: It is a developed-world company — based in Luxembourg, with roots in France — that is growing in the developing world. The company places its stores in higher-end shopping districts and promotes organic ingredients in its products. Its business is “booming in China,” Mr. Yockey said. In 2010, the company listed its stock in Hong Kong.
Less known among consumers but also strong in its market is Wirecard, a German online-payments processor, Mr. Yockey said. It was the fund’s largest position at year-end, at 8.2 percent. It, too, is reaching into Asia, where the adoption of online transactions has lagged the United States and Europe, he said.
Wirecard’s stock slumped in the second half of 2011, but surged in 2012 amid strong earnings, returning about 50 percent.
The Artisan fund, which Mr. Yockey has led since 2001, is closed to new investors. “We have no present plans to open it up, but we review that quarterly,” he said. Restricting its size — it had $765 million in assets at year-end — gives it more flexibility in buying small-cap shares. If a fund grows too large, it must buy far more shares of a given company to affect returns.
The fund, with an expense ratio of 1.5 percent, returned 9 percent in the quarter.
Article source: http://www.nytimes.com/2013/01/13/business/mutfund/at-3-mutual-funds-the-specialty-was-to-find-strong-returns.html?partner=rss&emc=rss