“We invest in the market like you’d invest in an individual company,” said Daniel Morris in a July 10 interview, “based on fundamentals and bottom-up analysis” of the market.
Morris, founder of Morris Capital Advisors in Malvern, Penn., and Joseph Doyle, CFA, together manage Morris Capital’s two no-load mutual funds—the Manor Fund (MNRMX—rated four stars by Morningstar) and Manor Growth Fund (MNRGX-rated three stars), along with separately managed accounts, primarily for high-net-worth individuals and small institutions. Rather than use “financial engineering” or event-driven investing that starts from the top down, Morris said the Manor funds' approach is to “focus on what makes sense in long term investment management; the market always comes back to the fundamentals.”
That common-sense, fundamentals-driven long-term approach in mutual funds, Doyle argues, allows clients to sleep better at night, owing to mutual funds’ transparency. The MF Global scandal, he says, “is a teachable moment” for investors, showing the value of transparency and daily liquidity.
MNRGX has returned 5.57% year to date through July 12, 2012, according to Morningstar, and 17.4% over the last three years, with just 10% turnover. MNRMX has returned 1.22% year to date and 13% over the last three years, with turnover of 11.9%.
The investing approach for MNRGX starts with the universe of large-cap stocks that are then screened to include stocks with strong earnings, strong cash flow, a strong financial structure and strong future growth prospects (including management having a strategic vision for the company) that are “attractively priced” based on those business fundamentals that will provide a tax-efficient return over the long term. “You have to have comfort,” says Doyle (left), with the long-term growth prospects of the companies they choose for the portfolios.
Overlaying those fundamentals is a management process that values low turnover but allows Morris and Doyle to use their knowledge of the markets and the macroeconomic picture “so we’re not surprised,” Doyle says—as might be the case, for instance, with cyclical stocks. “As growth-oriented investors,” says Doyle, “we’re interested in three to five years of growth rate prospects.”
So do Morris and Doyle visit companies to kick the tires and talk to management? No, says Morris. “We don’t talk to management or listen to CNBC, because they don’t tell the truth,” he says bluntly. The fundamentals, by contrast, don’t lie, and Morris says “we don’t want to interfere with the fundamentals.”
With their aversion to event-driven investing and their commitment to fundamentals, does Morris think the markets are efficient? “There are inefficiencies in the market regarding expectations” among investors, he believes, as demonstrated by companies that miss even by “a little” their earnings expectations and then see their stock prices fall far beyond the level of what the fundamentals suggest.
On the other end of the spectrum are companies whose stock prices don’t reflect their value on the upside. Take, for example, Apple (AAPL). Doyle recalls that Morris Capital bought Apple in 2006 not because it envisioned the company’s future success with the iPhone or iPad, but because with Steve Jobs and Tim Cook in charge, “we thought they were executing better.” With Apple’s previous control of the education market, Doyle thought that Apple would do better with consumers in the PC space with its Macintosh.
“We got a rare gift from the stock market,” he says, “which never gave them credit” for their execution in terms of Apple's stock price. Apple rose to become 5% to 6% of the portfolio, which has since been trimmed twice back to its original percentage of the portfolio, since Morris says that as part of their sell discipline, “from a risk controlled sense we had to.”
As for stocks that have been added to their portfolios lately, in Manor Growth, Morris (left) mentions Cummins (CMI), which has the required growth strategy but also is benefiting from international sales, particularly in developing nations. Then there’s Edwards LifeSciences (EW), which he thinks will benefit from growth in the health care sector with its artificial heart-valve products.
An addition to the Manor Fund, which Morris calls “more conservative” than the Growth Fund and which Morningstar places in the large-cap blend style box, is BE Aerospace (BEAV), which supplies safety-related cabin interior products to both Boeing and Airbus and which will benefit from the continued need for airline security and airline growth in Asia.
Despite the fact that “governments have allowed enormous risks” to enter the markets, Doyle says, he still believes there’s “huge unrealized growth potential in reasonably priced growth stocks.” At Morris Capital, he concludes, “we’re data driven, but not black box.” Both Morris, who seeded with his own money the two mutual funds at inception, and Doyle say they are invested in MNRMX and MNRGX.