Quick Take: In a year when investors have been pulling money out of stock mutual funds at a record pace, assets in the Sentinel:Balanced Fund/A (SEBLX) have held steady, says Van Harissis, who oversees the fund’s stock portfolio. The $230-million fund, which invests in stocks and bonds, has had neither excessive outflows nor inflows of cash, he says.
In picking stocks, Harissis hunts for undervalued shares of companies with strong free cash flow.
The fund lost 9.9% this year through August, but that put it well ahead of the Standard & Poor’s 500 index, which was off 19.4%, and about even with the average large-cap fund balanced fund, which fell 9.8%. For the three-year period ended in August the fund has edged out its peers, slipping 1.5%, versus a loss of 2.2% for the average large-cap balanced fund.
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Van Harissis would rather be investing aggressively, but disappointing corporate profits and the tepid economic recovery have forced him into a crouch lately.
The Sentinel Balanced fund currently has about 55% of its assets in stocks, compared to a more typical 60% to 65%, says Harissis. In the last few months the fund has been adding bonds, which now comprise some 40% of its holdings, he says. The remainder of the portfolio is in cash.
“Right now, I think the environment out there dictates some caution,” says Harissis, adding he would “love” to see the fund’s stock allocation at its mandated maximum of 75%. For that to happen, company earnings will have to pick up quickly, he says.
When he is buying stocks, Harissis looks for what he calls “the 10% solution,” that is, a combination of factors, including dividends, that can provide at least that much in total return.
Harissis focuses on mid-sized and large companies with strong free cash flow, or money earned from operations, minus capital expenditures. He sees this as a more accurate gauge of a company’s health than earnings, which he notes can be manipulated.
He prefers inexpensive shares. The price-to-earnings ratio of the portfolio is about 18.5, compared to 20.5% for the Standard & Poor’s 500 index. The fund carries a price-to-cash flow multiple of 12.5, versus the index’s 14.
After the fund manager identifies a cheap stock, he scans for a catalyst, like new management or a restructuring, that can give it a boost.
Low debt is high on Harissis’ list of buy criteria, and he also wants companies that can grow their bottom lines. “It doesn’t have to be frenzied growth,” he says. Percentage gains in the mid-teens are fine.
Two of the most recent additions to the portfolio, which usually holds 65-100 stocks, are energy stocks: Kerr-McGee (KMG), and Tidewater Inc (TDW). Stocks in the sector, including those two, look cheap, Harissis says, because they don’t reflect oil prices, which have risen of late because of the threat of U.S. military action against Iraq.
Kerr-McGee, which explores for oil and natural gas and also has a chemicals business, is attractive because it has been selling off poorly performing operations and is itself a potential takeover target, Harissis says.
Harissis says he likes Tidewater, which supplies ships and support services to energy companies, because it is debt-free and sports a dividend yield of more than 2%.