Quick Take: Unlike some investors, Jamie England likes companies with problems. He believes the management team of Meridian Value Fund (MVALX) is good at finding troubled companies poised for a rebound. England says the team considers companies of all market caps, and in all sectors. Currently, the fund’s median market cap is about $3.5 billion, and its largest sectors are technology, consumer products, and industrial products.
The fund’s team likes to invest in a company before the market recognizes its turnaround potential. However, the team considers troubled companies for some time before actually investing in them. Such caution has helped dampen the fund’s volatility: The portfolio has a three-year standard deviation of 15.05%, versus 17.20% for mid-cap value funds on average. Even with below-average volatility, the fund has a strong long-term record.
Meridian Value has outperformed its peers in eight of the past ten years since its inception. The fund achieved a ten year average annualized return of 19.4%, versus 12.1% for its mid-cap value fund peers. Though Kevin O’Boyle stepped down as manager at the end of 2003, a position he held since 1995, England, who was an analyst on the fund since August 2001, will maintain the investment style under the direction of founder Rick Aster.
The Full Interview:
S&P: What is your basic investment philosophy?
ENGLAND: We look for companies that are having problems and then try to determine what’s causing them. If we feel it is something that can be fixed, we look into investing in the company before it turns around. After the company has a good quarter, the market starts to recognize it.
S&P: Where in the market do you look for turnaround stocks?
ENGLAND: We invest in all industries and in companies of all market capitalizations. Our median market cap it about $3.5 billion, and our holdings range from $600 million to about $20 billion in market cap.
S&P: Would you describe a representative holding?
ENGLAND: A quarter or two ago, we invested in Furniture Brands Intl (FBN), which had problems because the furniture industry was weak. Auto sales were strong, which hurt demand for furniture. Strong home sales, however, created pent-up demand for furniture. Furniture Brands, which was developing a better cost structure, was able to benefit when demand picked up.
S&P: Has the economic rebound made it more difficult to find turnaround situations?
ENGLAND: There have been fewer opportunities, but that’s not a big deal. Now, our strategy differentiates us from other investors. When the whole market is having problems, everyone looks at the same stocks that we do.
S&P: What are the fund’s largest sectors?
ENGLAND: Technology (13%), consumer products (11%), and industrial products (10%). Lots of tech companies have had rough times over the past few years. Technology stocks have been coming back recently, which has helped our performance. Now, we’re looking less at technology stocks.
S&P: Based on standard deviation, the fund is less volatile than its peers. What is your approach to market volatility?
ENGLAND: We don’t consciously try to keep volatility down, but our volatility tends to be low because we look at companies for awhile before we buy them. This weeds out the more volatile companies. We also don’t hold stocks for a considerable amount of time. On average, we own a stock for one and a half years. We don’t wait until things go well because it can take awhile for a company to fix its problems.
S&P: What are the fund’s largest holdings?
ENGLAND: The top five holdings are SAFECO Corp. (SAFC), ServiceMaster Co. (SVM) , Waste Management (WMI), Kimberly-Clark (KMB), and DaVita Inc. (DVA). We’ve owned SAFECO for awhile, but there’s still room for improvement. ServiceMaster has very good valuations, and is just starting to do better. Waste Management should do better as the economy improves.
S&P: Would you describe a recent purchase?
ENGLAND: Boyd Gaming (BYD) has had about a year of negative earnings, and has been hurt by weak tourism and gaming tax increases. Now, they are absorbing the tax increases and participating in an joint venture in a new Atlantic City casino.
– Bill Gerdes