An Eye for Ugly Ducklings


Like many value investors, Laura Sloate, manager of Strong Value Fund (STVAX), is willing to take a contrarian position. She holds stocks that are suffering setbacks, or invests in industries that face difficulties. Examples of turnarounds that she's betting on include oil-field services giant Schlumberger and real-estate investment trusts (REITs).

Sloate also speaks her mind about broader issues facing the markets and Corporate America. She's concerned about the large amounts of capital in derivatives, and feels that some corporate boards are dominated by "buddies" of CEOs. Taking the long view, however, she notes that "every market cycle...has its share of criminals."

Over the long term, Strong Value has held up better than most

large-cap value funds, rising an annualized 1.6% for the five-year period through May, vs. a 0.1% gain for its peers. More recently, the fund has modestly trailed its counterparts, returning 9.5% this year through May while its peers rose 9.8%. Based on return and risk characteristics over the last three years, Standard & Poor's has an overall rank of 3 Stars on the portfolio. Bill Gerdes of S&P's Fund Advisor recently spoke with Sloate about the fund's strategy. Edited excerpts from their conversation follow:

Q: What's your basic investment philosophy?

A: I focus more on individual stocks than sectors. The fund is targeted to the Russell 1000 Value Index, but we aren't shadow indexers. I look for stocks with attractive fundamentals and prices. The entry price for a stock is the most important criterion. We generally look for companies with some sort of catalyst, such as a new product, restructuring, or acquisition.

Q: Would you give an example?

A: Schlumberger (SLB) is a turnaround story. It's a great company that made a very dumb acquisition of a dot.com. They'll probably get 10 cents on the dollar from that investment, but they're now refocusing on their strengths in oil services.

Q: Do you consider any

top-down trends?

A: I'm in the camp that believes consumers are going to be spending more. Outside of buying autos and housing, consumers haven't spent much money for the past two years. As a result, consumer spending is likely to rise, especially if the unemployment rates goes down to 5%. Our consumer picks include McDonald's Corp. (MCD), Sony Corp. (SNE), Warnaco Group (WRNC), and Tiffany & Co. (TIF).

Q: Your cash position ranged from 25% to 30% earlier in this year. Was that stance based on any top-down considerations?

A: I am willing to make a cash bet. A lot of funds perform badly when managers are forced to be fully invested when they shouldn't be. Our objective is to make money for our shareholders.

Q: What are the major investment themes currently in the fund?

A: They include consumer discretionary and business services, which are cyclical, and some sectors which had been depressed, such as REITs.

Q: What's your view of the financial-services sector?

A: We are underweighted in financials relative to the Russell index. Many bank stocks have had good moves up, and several insurance companies are long in the tooth. We think Citigroup (C) and American International Group (AIG) have very high-quality managements.

Q: What's your view of the recent questions about corporate governance?

A: I've always looked closely at corporate accounting. I never owned Cendant (CD) because they had very low-quality accounting, and I avoided Halliburton (HAL) because their accounting is a mystery.

Q: Do you think there's been sufficient reforms as a result of the corporate scandals?

A: Other reforms are needed. I think shareholders should be able to vote on competing slates of directors. I also think that shareholders should ratify managements' compensation agreements.

Q: You've been in the financial industry for more than 30 years. How does this current period of scandal and reform compare with past periods?

A: Every market cycle, whether the 1970s with the conglomerates or the late 1980s with junk bonds, has its share of criminals. Each new period of scandals seems to get bigger and involve more dollars because the financial markets have grown considerably. For example, we have no idea how much money is now in derivatives.


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