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Get Four
|  | JANUARY 7, 2005
 FUND Q&A Big-Game Value Hunters [Page 2 of 2] Q: What are your buy criteria for stocks? Atkins: Most importantly, a stock must have at least a 2% dividend yield. Liquidity is the second criterion -- it must have 500,000 [traded shares] minimum daily volume. A stock must also be in the mid-cap space or larger. Generally our stocks are large-cap -- $12 billion and up -- or high mid-cap. We're more flexible regarding market cap than liquidity. But for us to buy something with a $2 billion market cap, it would have to be a very compelling story. Our three screens reduce our universe to about 150 to 250 names, from which we select 45 to 50 stocks for our portfolio. We buy only stocks traded in the U.S. We'll look at ADRs [American depositary receipts], but won't buy anything traded exclusively on a foreign exchange. Belden: We want to own 75% large-cap stocks weighted over time, relative to Lipper's definition. Atkins: Our qualitative criteria include catalysts for value or appreciation -- a story that will eventually be recognized by the market and drive stock-price appreciation. Q: What are your sell criteria? Atkins: If a stock yields less than a 1% dividend, with no prospect for an increase, or if it declines 30% from our average cost, we will exit by end of quarter. That protects our downside. One reason we say we'll exit by the end of the quarter is to let the selling pressure abate. Fundamental deterioration in a company's financial strength would precipitate a sale. We call this qualitative because there's no rule associated with it. But simply finding better names makes up the bulk of our sell decisions. Q: Are there any areas or sectors that you avoid? Atkins: We've typically stayed away from utilities because they're highly regulated, offering limited return on capital and more difficult to value. Q: How do you manage risk in the portfolio? Belden: Risk management is inherent in the portfolio construction and stock selection process. Atkins: We set stock weightings at 5% maximum, although we start trimming anything over 3.5%. Most individual stock weightings are anywhere between 1% and 3.5%. We won't have more than a 20% weighting in any particular industry, but don't have a sector constraint. Q: Could you mention one or two holdings and tell me how they reflect your investment style? Atkins: We recently added Bristol-Myers Squibb (BMY ). It's a very liquid large-cap stock in a sector that's out of favor, trading at about 13 times earnings. They've got some new drugs that should be coming to market within two to three years, when we think it will be well positioned. With a 4% dividend yield, you're getting paid to wait. Another recent addition is SBC Communications (SBC ). It's got a 5% dividend yield, trades at only about 17 times earnings, and is pretty cheap on the book value as well. We expect telephone companies to come out ahead in the long-term battle between telephone and cable, because they are financially much stronger. Q: Year-to-date as of Oct. 29, the fund's return, 3.84%, was slightly below its peers' 4.30%, after outperforming them on both the one- and three-year periods. What accounts for this downturn, and what are the chances that it will turn around? Atkins: The bulk of that underperformance was because of Merck (MRK ) and Marsh & McLennan (MMC ), both of which declined substantially at the same time. We've sold those stocks and added Bristol Meyers and SBC. I think we've already started to turn around. Q: Do you have an outlook for the market and for your asset class? Atkins: We're predicting average market returns in the high single digits over two to three years, as higher interest rates and inflation, the budget deficit, and a lower dollar, provide a headwind for the U.S. economy and stocks in general. In that environment, our style, which emphasizes dividend yield as a component of total returns, will be attractive.
 From Standard & Poor's Fund Advisor All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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