Quick Take: Kenneth Feinberg and Christopher C. Davis, co-managers of Selected American Shares (SLASX), like to buy companies whose earnings are growing consistently, but that are trading at depressed valuations. For example, it could be because a company is facing some bad news, or because the market is simply overlooking it. Once they buy a stock, the managers like to hold onto it for the long-term.
For the year ended July, the $6.7-billion portfolio gained 17.2%, versus 11.7% for the average large-cap blend fund, and 13.2% for the Standard & Poor’s 500 Index. For the three-year period, the fund rose 2.4% annualized, versus losses of 2.0% for the peer group, and 1.5% for the index. What’s more, the fund has lower volatility than its peer group, lower expenses, and significantly lower turnover.
Feinberg, who joined the fund in May 1998, also co-manages the Davis New York Venture Fund (NYVTX) and Davis Financial Fund (RPFGX) for Davis Selected Advisers, L.P., the investment adviser for the both Selected Funds and the Davis Funds.
The Full Interview:
S&P: What kind of stocks do you look for?
FEINBERG: We invest in mid- or large-cap companies that are trading at modest valuations, but that have long track records of earnings growth and sustainable forward earnings growth rates. We like to hold onto our stocks for the long-term.
S&P: What else characterizes your investment strategy?
FEINBERG: We put great emphasis on meeting with company managements and making sure they are committed to their shareholders. We want to understand a company’s business model, their products, and their competitive environment. We think our investment process ensures stable long-term performance and minimizes risk and volatility.
S&P: What are your ten largest holdings?
FEINBERG: As of June 30, 2004: American Express Co. (AXP), 6.8%; American International Group (AIG), 5.3%; Altria Group (MO), 4.8%; Tyco International (TYC), 4.6%; Berkshire Hathaway (BRK.A), 4.6%; HSBC Holdings (HBC), 3.5%; Bank One Corp. (since acquired by J.P. Morgan Chase), 3.4%; Citigroup Inc. (C), 3.3%; Progressive Corp. (PGR), 3.3%; and Wells Fargo (WFC), 3.2%.
The top ten holdings represented 42.8% of total assets. Typically, our ten largest stocks account for 42% to 48% of assets. The fund currently has 62 holdings. We prefer to keep a relatively concentrated portfolio.
S&P: What are your largest industries?
FEINBERG: As of June 30: insurance, 18.9%; financial services, 16.0%; banking and savings & loan, 15.6%; energy, 7.1%; and consumer products, 4.8%.
S&P: How would you characterize the kinds of companies that populate the portfolio?
FEINBERG: Stocks in our fund typically fall under three categories: The bulk of our assets are invested in the familiar, household names that are strong global leaders; a smaller portion is invested in companies that have strong business fundamentals, but that are less well known, and perhaps overlooked by the general investing public; and the last portion consists of companies whose stocks are facing pressure due to some controversy or negative headlines.
S&P: Can you discuss one of each of these types of stocks?
FEINBERG: American Express, which has been in the fund for 10 years, is clearly a blue chip, global leader. It was under various clouds when we bought it after having been poorly managed by former CEO James Robinson. When Harvey Golub took over the company in 1994, he and Ken Chenault, the current CEO, immediately cut some costs and made the company more entrepreneurial, focusing particularly on their long neglected credit card business, which faced very tough competition. They brought the company out of the doldrums, and their core card business flourished. Over the past decade they have bought back 20% to 25% of shares outstanding. We initially bought the stock when it traded at a 10 P/E, it is now at 19.