Quick Take:Value funds have done better than most U.S. stock funds lately, but Clipper Fund (CFIMX) holds the record as the best-performing large-cap value fund (+18.3% annualized) for the ten-year period through last March. Lead manager Michael Sandler is the first to admit that recent results can skew relative standings, although Clipper has also held its own lately, rising 11.9% for the one-year period through April, while the average large-cap value fund fell 6.8%.
Sandler may be modest — “I can’t guarantee that our future returns will look as good” — but he traces his fund’s sucess to waiting patiently for leading companies to stumble. Betting on bad-luck stories, Sander says he “constantly tries to look beyond the chasms for intact franchises that will emerge stronger.”
Sandler has found promising turnarounds in many sectors, although he isn’t comfortable with tech or biotech companies. True to his dictum that periods of panic selling often represent buying opportunities, Sandler recently picked up Tyco International (TYC), believing its cash flows will be solid down the road.
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S&P: Why is the fund’s long-term record so strong?
SANDLER: Recent returns can often affect your long-term record. For instance, our numbers didn’t look so good during the tech bubble when we refused to play the technology card. The best-performing managers over the long term are willing to differentiate themselves from their benchmarks.
While I can’t guarantee that our future returns will be as good, I think our returns so far have come from consistently looking for leading companies whose stock is trading at a discount to their business fundamentals.
S&P: Are you a deep value or a relative value investor?
SANDLER: We take an absolute value approach rather than a relative value approach. That means we don’t look for stocks that are undervalued relative to overvalued markets. We try to decide what a company is worth regardless of the economic environment, interest rates, or foreign exchange rates.
S&P: How do you find undervalued companies?
SANDLER: We visit companies, kick their tires, and tear their businesses apart to understand the underlying fundamentals. We start with a small team. When someone on our team comes up with an idea, we pick a devil’s advocate to challenge the proponent’s assumptions to make sure we’re not missing anything.
S&P: Do your holdings have common characteristics?
SANDLER: Most of our companies throw off more cash than they consume, so we try to make sure the managements are wisely investing that excess cash. To do that, we spend a lot of time with managements asking them where they want to take their companies over the longer term.
When we look at a potential holding, we first consider what is today’s value of the company’s future cash flow? Cash flow helps you look beyond a company’s earnings to its true fundamentals. At the end of the day, a company is going to get into trouble if it isn’t generating more cash than it consumes.
S&P: Would you describe some holdings that meet your cash-flow criteria?
SANDLER: Fannie Mae (FNM) and Freddie Mac (FRE) have gained market share by adding portfolios to their balance sheets rather than simply guaranteeing mortgage payments. Both companies have very high margins.