Quick Take: The managers of the Sound Shore Fund (SSHFX) keep a “considerable amount” of their own money in it, according to T. Gibbs Kane Jr., who helps oversee the portfolio.
“It’s a convenient way for us to own the stocks that our clients own,” says Kane, the president of Sound Shore Management Inc., the fund’s investment advisor. In all, Sound Shore manages about $3.5 billion in assets, mostly for institutions.
In choosing investments, the managers scan for large companies whose stocks are trading below their historical multiples because of a problem that the team thinks is transient. The $1.6-billion fund has consistently kept ahead of its peers and the Standard & Poor’s 500-stock index over the short and the long run.
This year through April, Sound Shore gained 1.3%, versus 0.4% for the average large-cap value fund, and 0.1% for the S&P 500. For the ten years ended last month, Sound Shore returned 12.8%, on average, versus 10.1% for its peer group and 11.4% for the index.
In addition to its outstanding returns, the Sound Shore fund also sports an expense ratio of 0.98%, versus 1.40% for the peer group. The portfolio is no more volatile than the average large-cap value fund and has a lower beta.
The Full Interview:
When it’s suggested to money manager T. Gibbs Kane Jr. that he invests like Goldilocks, he doesn’t disagree. After all, both shun extremes.
“We’re not looking for absolutely terrible companies and awful businesses,” says Kane, who helps run the Sound Shore Fund. “And we’re not looking for companies that are just terrific in terms of margins and returns on equity and returns on investments.”
Kane and the other members of his team look for companies with good earnings potential whose stocks have been been beaten down because of some problem he thinks is only temporary.
The managers start by screening 10,000 companies, most of which they dismiss. They hone the list down to about 1,250 businesses with market caps of $2 billion or more, hunting for those with stocks priced low compared to the company’s earnings, book value, sales or cash flow relative to the share’s history.
When assessing margins, Kane says he prefers those at the low end of their historical range because that leaves room for expansion. He also likes to see strong free cash flow, and large or dominant industry positions. In researching companies, the fund’s managers and analysts talk to management, as well as suppliers, customers and competitors. Ultimately, 40-50 stocks enter the portfolio.