Quick Take:Funds that invest in undervalued stocks of big companies have performed better than the overall stock market so far this year, although not by much. That’s true of Exeter Fund:Maximum Horizon Series/A (EXHAX), too, which searches for stocks of companies with staying power.
The fund lost 26.1% for the nine months ended in September, but that put it ahead of the Standard & Poor’s 500-stock index, which fell 28.2%. In comparison, the Exeter Maximum Horizon’s large-cap value fund peers were off 25.7% during the period.
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When analyzing stocks in cyclical industries, the team that oversees the Exeter Maximum Horizon Fund borrows from Charles Darwin. The managers search for businesses they see as most likely to outlast a downturn in a sector and to lead the recovery when conditions improve.
“We’re trying to buy the survivors,” says Jeffrey Herrmann, who helps run the portfolio. “One way to think of it is: I want to be the guy driving the cement mixer at the demolition derby.”
In a similar vein, the managers look for businesses that dominate their fields and that have some sort of sustainable competitive edge, like patents or well-known brands. They lean towards inexpensive stocks of companies with growing earnings.
The team also hunts for companies whose stock price does not appear to fully reflect the value of their underlying assets and cash flow. Within this group, the managers then look for a catalyst that can boost a stock, like new management or a restructuring.
The approximately $60-million fund concentrates on large and mid-sized companies and typically owns 45-55 stocks.
A recent addition to the portfolio is toy and game maker Hasbro Inc (HAS). The company stands out, Herrmann says, because it and Mattel, Inc (MAT) are the two biggest players in their field. Hasbro also generates loads of free cash, but doesn’t have to plow a lot of it back into the business, in part because it contracts out manufacturing, Herrmann notes. That leaves money available to pay dividends or buy back stock, he says.
The managers began buying Hasbro three weeks ago. Their shares cost $11 on average. The stock closed at $11.17 today.
Among companies in troubled industries, the team have been investing in aluminium producer Alcoa Inc (AA) lately. Although aluminium prices have been depressed and the industry has been suffering from excess smelting capacity, the managers say, they expect Alcoa to prosper because it is one of the lowest cost manufacturers in the industry. They also like Alcoa’s global presence.
The managers started investing in the Pittsburgh-based company in September, paying $19-$20 per share, on average. The stock closed at $19.11 today.