Quick Take: Investors often unfairly punish solid companies reporting temporary shortfalls, notes Robert Levy, manager of MassMutual Instl Funds Focused Value/A (MFVAX). He says that focusing on the long term helps him uncover promising opportunities temporarily hurt by over-emotional investors.
Last year, when cable television stocks were hurt by concerns about competition, Levy moved into the industry, most notably with Cablevision Sys`A` (CVC). A subsequent turnaround in that area, along with success in some high-quality retailers, helped Levy’s fund avoid the steeper lows of the recent market downturn.
For the one-year period through April, the fund was up 1.1%, while the average mid-cap blend fund fell 15.9%. This year through April, the fund rose 12.3%, versus a 4.3% gain for its peers.
The Full Interview:
S&P: How do you approach value investing?
LEVY: We define value investing based on three tenets: First, we calculate the intrinsic value of a company, and then look to buy the stock at about 60% of the intrinsic value. Second, we like to invest in companies that are expected to grow over time, so we can avoid ones that are secularly impaired. Third, we like to invest in companies where management has the same perspective as shareholders, in terms of the companies’ underlying value.
S&P: How else might your strategy add value?
Our long-term perspective has been a big plus, because we can take advantage of short-term moves in stocks that are greater than the changes in the companies’ business values. For example, investors may overreact to a company that has a disappointing quarter, but we may realize that this hasn’t affected the company’s long-term business value. We can focus on the long term instead of short-term emotions.
S&P: Have you found opportunities in the recent market downturn?
LEVY: In the past year, we bought some cable television companies when there were concerns about competition in the industry, and, in particular, the financial strategy of Cablevision Sys`A` (CVC), one of our largest holdings. We had closely followed the cable industry for several years, and felt they would work through their problems.
S&P: Are there other broad themes in the portfolio?
LEVY: We moved into several high-quality retailers when they came under pressure, along with just okay retailers. One of our best performers this year has been Best Buy (BBY), a dominant consumer electronics company. It had fallen from the 40s to 18, but we felt its long-term prospects were very attractive. Six months later, it rose to 37.
We also have exposure to some travel companies hit by short-term problems: Carnival Corp. (CCL), Starwood Hotels&ResWorldwide (HOT), and Cendant Corp. (CD).
S&P: Have the corporate governance scandals affected your search for corporate managements that are aligned with shareholders interests?
LEVY: The push toward full disclosure, particularly Regulation FD, has been a big plus in understanding company fundamentals.
S&P: Why do you follow a focused investment strategy?
LEVY: If you want to maximize the benefits of stock selection, a focused portfolio is the right vehicle. We strongly feel that approximately 20 stocks is adequate for diversification. If you hold 80 to 150 names, you’re probably a closet indexer, which makes it difficult to beat an index.
S&P: How do you keep the portfolio diversified?
LEVY: We have a rule of no more than a maximum of 35% of the portfolio in a broad sector, no more than 20% in an industry, and no more than 10% in a company.
S&P: What is the fund’s current cash position?
LEVY: Right now, we’re close to 10%. Generally, it’s between 3% and 10%. We had sold off a few things that reached our targets, and we’re now waiting for a few things to drop to our prices. I would expect our cash position to be 3% to 4% in a matter of weeks.
S&P: What areas do you think you’ll be moving into?
LEVY: We’re thinking about economically sensitive firms that would benefit from a recovery, which we feel is at hand.
S&P: Why has the fund done well over the past one-year period?
LEVY: Sticking with a disciplined approach has helped us during a highly emotional period.