Quick Take: Victory Diversified Stock Fund/A (SRVEX) uncharacteristically lagged its peers earlier this year. The $1.4 billion fund was down 1.5% through the end of April, while the average large-cap blend fund was off 0.2%.
The fund had been hurt by profit taking in stocks like Alcoa Inc (AA), says Paul Danes, one of Victory Diversified’s three portfolio managers. Losses by Comcast (CMCSK) and Kroger Co. (KR), which had been winners in 2003, also weighed on the fund’s performance, he says. All three stocks are still in the portfolio, though.
But as investors have warmed up to the large-cap stocks that the fund focuses on, its returns have strengthened. This year through May, Victory Diversified rose 0.9%, compared with a 0.93% gain by similar funds.
The fund has comfortably outpaced its rivals over the long term, returning 3% and 13.3%, on average, for the five and ten years ended in May. Its peers lost 1.2% and gained 9.7% during those periods.
In picking stocks, the fund’s three managers initially decide on a sector mix. Then they look for companies with inexpensive stocks and growth potential.
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Before deciding which companies to buy, the managers of the Victory Diversified Stock Fund decide how to divide its assets among the sectors in the S&P 500-stock index. Depending on the trio’s outlook for the economy and the stock market, the weights will be between 50% and 200% of that gauge’s.
Next, the team decides which stocks to invest in, focusing on shares of large companies that are inexpensive compared with their historical valuations and that have a catalyst in place to possibly spur earnings growth. They also favor managements that reward shareholders with things like hefty dividends. The portfolio typically has 50 to 70 holdings.
“We’re trying to pick cheap stocks that we think can perform in the environment that we envision,” says Paul Danes, who helps run the fund. He and Caroline Rains joined lead portfolio manager Lawrence Babin four years ago.
In February, the fund invested in air express shipper FedEx Corp. (FDX). Investors had soured on the company because they were suspicious of its acquisition of Kinko’s, Rains says. Analysts, she says, were unsure of how that company, which operates about 1,200 copy centers that also provide business services, would fit into FedEx.
Working in FedEx’s favor, says Rains, were its operations in Asia, where the Chinese economy was booming. That led the fund’s managers to conclude the company had “good growth prospects” and an opportunity to reinflate margins, which had shrunk, she says.
Their bet on Fedex paid off today. The stock traded up $0.93 to $76.94 after the company forecast fiscal fourth quarter earnings that topped Wall Street expectations. The fund’s FedEx shares cost about $70 on average.
Another stock that entered the portfolio last quarter was Kohl`s Corp (KSS), a once highflying retailer that had come back to earth after missing analysts’ estimates along with some fashion cycles, Danes says. “They were at the wrong end of some consumer purchasing trends,” he says.