Quick Take: Because stable, industry-leading stocks aren’t often attractively priced, those facing temporary setbacks often present the best opportunities, says Scott Moore, manager of American Century Value/Inv (TWVLX). To enhance the risk rewards of these kinds of investments, Moore and the fund’s other managers, Phillip Davidson and Michael Liss, search across the market-cap spectrum for potential holdings.
Moore feels the market currently is less attractively priced overall because of its recent run-up, but he ‘s found some opportunities due to high energy prices, such as with Union Pacific (UNP).
To lessen the downsides of investing in troubled companies, Moore likes to trade around positions rather than buying or selling outright. This strategy may have resulted in a relatively high turnover of 100% to 130%, but the fund’s volatility is still moderately low relative to the S&P 500-stock index, based on three-year standard deviation — 14.85% versus 16.51%.
The fund’s cautious approach to investing in beaten-down companies has held up over the long term and recently. For the three-year period through last month, the fund rose 7.2%, on average, compared with a 2.1% loss for the S&P 500. For the one-year period through May, the fund was up 21.8%, versus a 18.3% rise for the S&P 500.
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The Full Interview:
S&P: What is the fund’s basic investment strategy?
MOORE: It’s a classic value fund searching for high-quality stocks with transitory problems resulting in low price/earnings ratios. The underlying companies are number one or number two in their areas. We look across the market cap spectrum for ideas, although we generally consider companies with market capitalizations of $1 billion and above. The fund’s median market cap is about $9 billion.
S&P: Why do you consider stocks of all market capitalizations?
MOORE: We feel strongly that our analysts and managers have industry expertise that isn’t limited to small, medium, or large companies. It wouldn’t make sense for us to avoid those opportunities, since it’s not easy to find companies with attractive risk rewards.
S&P: Would you describe some recent transitory problems that have led to opportunities for the fund?
MOORE: With fuel prices at historic highs, we’ve started to see several companies face cost pressures, which have impacted stock valuations. One of our top ten holdings is Union Pacific (UNP). It has had fuel cost difficulties, but it has a dominant position in the West Coast.
S&P: Are there currently more or fewer undervalued investment opportunities than in the past?
MOORE: The market is less undervalued overall now than usual. It has come off some lows, so we don’t see the outsized returns like before.
S&P: What are your largest sector overweightings?
MOORE: Our largest overweighting is in the broad industrial space, including railroads. We also have small overweightings in aerospace, defense, construction, and engineering. A typical holding is Martin Marietta Materials (MLM), a road construction company that’s facing pressures from state government cutbacks on road building.