Quick Take: When it’s pointed out to portfolio manager Jonathan Simon that his fund finished 2002 in the black, he responds: “Just.” Still, a ball that scrapes the back of the outfield wall on the way down is a home run.
The JPMorgan Mid Cap Value Fund/I (FLMVX) that Simon pilots returned only 3.2% last year. But that put it ahead of the average U.S. stock fund, which fell 23%, and its peer mid-cap value funds, which were off 14%. A retail version of the institutional fund has been available since April 2001.
Simon looks for undervalued stocks of medium-sized companies, which the fund’s literature defines as those with market caps of $1 billion to $20 billion. He concentrates on businesses with robust returns on invested capital, strong free cash flow, and low debt. The portfolio has been ranked 5 Stars by Standard & Poor’s since November 2000.
The Full Interview:
While most domestic equity funds posted losses last year the JP Morgan Mid Cap Value Fund eked out a gain. What went right?
Jonathan Simon, who oversees the portfolio, says newspaper publishers like Washington Post`B` (WPO) helped. The company’s stock rose about 40%, making it one of his best performers.
A long-time holding in the fund, Simon was originally drawn to the company because of the strengths of its businesses and its management’s strategy.
In addition to the Washington Post, which dominates its local market and has a national readership, the company owns six network-affiliated television stations. Both units, Simon explains, generate lots of cash that management has used to expand the company, investing in cable television systems and in assets to supplement its Kaplan Inc. educational services subsidiary.
“We like the fact that this is a company that was managed for the long term, that was not managing quarterly earnings,” Simon says. Because of the stock’s recent rise, however, Simon adds that he has cut his position in half to 1.5% of the fund’s assets.
Elsewhere in the publishing and broadcasting field, Simon owns Scripps(E.W.)`A` (SSP), which climbed about 16% in 2002, and Gannett Co (GCI), which gained 10%.
In picking the 70 to 90 stocks that make up the portfolio, Simon focuses on companies that generate above-average returns on invested capital compared to their rivals, and that produce strong free cash flow. Low debt is high on his list, and he also prizes franchises that are walled off from competition.
Once he identifies an investment, Simon prefers to buy it on the cheap. Currently, he is finding companies with the financial characteristics that he wants whose stocks are trading at less than 15 times projected 2003 earnings. Occasionally, though, “we’re prepared to pay a slight premium for a truly exceptional company,” he says. The fund manager will accept a price-to-earnings ratio of up to 20 for businesses he believes possess “clearly superior characteristics.”
The five-year-old fund can buy companies with market capitalizations of $1 billion to $20 billion, but 90% of its holdings right now have caps of $10 billion or less, according to Simon. “That’s where we’re finding the best combination of quality and value,” he says.
As an example of the kind of company he hunts for, Simon cites Charter One Finl (CF), a bank holding company that he began buying in November. Charter One’s units have been expanding their lending and deposit businesses while taking market share from bigger banks, Simon says. The subsidiaries serve consumers in Ohio, Michigan, Illinois, New York, Vermont and Massachusetts.
Simon says he has been drawn to similar medium-sized banks because he feels they can make inroads on large lending institutions by providing personal service to individuals. His fund also has stakes in North Fork Bancorp (NFB), TCF Financial (TCB), Cullen/Frost Bankers (CFR), and Wilmington Trust Corp (WL).
Rural telephone company ALLTEL Corp (AT) is a favorite for the portfolio manager. Simon sees it benefitting from the FCC’s proposal to end a requirement that local phone companies rent their networks to long-distance rivals cheaply, a move that could cut competition in the local phone market.
The No. 1 stock in the fund is Clayton Homes (CMH), which builds, finances and insures so-called manufactured homes. That industry is experiencing problems, but Clayton is a “survivor” that will be “in a very strong position to make a lot of money” when conditions improve, Simon says. In the meantime, the stock is trading at a small premium to the company’s book value, he says.
An oil and natural gas company, Devon Energy (DVN), ranks second in the portfolio. Simon applauds the Oklahoma City, OK-based company because it grows by making opportunistic acquisitions, buying companies when they are inexpensive because oil and gas prices are depressed. Devon completed its last buying round in mid-2001, and as energy prices have risen since then, it has been able to sell peripheral assets and use the proceeds to pay down debt, Simon says.
Although the stock market itself has suffered three consecutive years of losses, Simon sees it ending 2003 in positive territory because he feels equities are now more attractively valued than bonds. Good news about the economy and corporate profits probably won’t surface until later in the year, but stock prices can rise in anticipation, he says.
“I think we could get a 20% rise out of the Standard & Poor’s 500,” he says.