March 31, 2004 — “It’s almost impossible to buy companies at good prices unless they have problems,” says David Wallack, manager of T Rowe Price Mid-Cap Value Fund (TRMCX).
Wallack has coped well with troubled companies, and the offering has performed handsomely since he took over at the end of 2000. Each year since then, the fund has been in the top quartile of mid-cap value funds. For the three years through 2003, the fund rose 13.8%, on average, versus 8.0% for its peers. For five-year period ended in February, the fund returned 16.4% annualized, versus 12.3% for its peers.
Compared to his fellow managers, Wallack says he has a longer time horizon. The fund’s one-year 51.1% turnover, versus 71.9% for his peer group, suggests he is moderately more patient. Sizable inflows have actually boosted the T. Rowe Price fund’s turnover ratio.
In fact, the fund can hold some companies longer than its turnover suggests, since Wallack tends to trade around core positions, rather than buy or sell outright. It can take several years before a holding works out its problems, he says.
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To damped the downside of troubled holdings, Wallack looks for stocks of dominant companies in industries with high barriers to entry. He also likes companies with hidden assets, such as real estate or joint venture stakes.
The fund’s median market cap is about $3 billion. Wallack doesn’t have a maximum market cap for a holding, but he’ll stop adding to a position when its market cap gets higher than $15 billion.