Quick Take: David King, manager of Putnam New Value Fd/A (PANVX), considers attractively priced stocks as long as they have long-term potential. He doesn’t mind if a bargain stock has a bad month or two while he waits for a turnaround. “We’re not looking to keep the dust down,” King says of his long-term focus.
The manager also likes to hold a fairly small number of stocks. New Value is a relatively concentrated portfolio of 75 stocks, with the top 20 positions making up about half of the fund. “The road to superior returns in value investing probably involves being concentrated,” King says.
His focused approach and tolerance of market ups and downs may have boosted his fund’s risk profile, but it’s also generated handsome returns. The fund’s standard deviation is slightly higher than its large-cap value peers, but investors have been paid for the extra risk since the portfolio has steadily outperformed since the late 1990s.
For the five-year period through last month, New Value rose 5.6%, on average, versus a gain of 1.5% for its peers. More recently, while King feels there’s been little mispricing in the market, the fund has also outrun its peers. For the one-year period through July the portfolio rose 19.1%, versus 14.9% for its peers.
Though the fund underperformed during the tech bubble in 1998 and 1999, King, who’s managed the portfolio since 1995, says he wouldn’t manage money differently in another hyper market. “I would sit out the euphoria,” he says.
The Full Interview:
S&P: What are the investment goals of the fund?
KING: New Value seeks total return and capital appreciation through a relatively concentrated portfolio of about 70 stocks. The top 20 holdings generally account for about half of the fund. We look at companies that have been in business for ten years and that have trailing 12 months of revenues of at least $1 billion. We look at discounted cash flow.
S&P: How does New Value differ from Putnam’s other value funds?
KING: We are willing to take more risk to get higher returns. Most other funds at Putnam are explicitly conservative. We’re not looking to keep the dust down. I don’t mind having a bad month or a bad quarter. This fund focuses on superior total return over time. Our higher risk profile comes from being more concentrated. The road to superior returns in value investing probably involves being concentrated.
S&P: Like other value investors, do you look for out-of-favor companies?
KING: We look at the best relative assets, based on discounted cash flow. This may result in good companies that are out-of-favor, as in 2000. At other times, we’ve also ended up with controversial companies, like Tyco International (TYC). But I don’t look for controversy. I don’t look to own all the stocks that people hate. If we think something has long-term value, we’re willing to consider it.
S&P: Which areas of the market currently offer the best opportunities?
KING: At the moment, the market is not out of balance. Currently, opportunities are spread across sectors, including some consumer cyclical companies, which look attractive. We have good-size positions in Home Depot (HD) and Masco Corp. (MAS).
The market has backed off financials, but we like Citigroup Inc. (C), which has lagged since Sandy Weill stepped down as CEO. There haven’t been any negative changes there since, but the stock has lagged.
We also like some high-quality companies that are less understood, such as Service Corp. International (SRV), a large funeral home company, and Hercules, Inc. (HPC), a specialty chemicals producer.