Quick Take: In the brief time it has been around, the AXP Mid-Cap Value Fund/A (AMVAX) has stayed ahead of its competition. The $331-million fund, which began operating in February 2002, was up 9.3% this year through September, versus a gain of 5.8% for the average mid-cap value fund. In 2003, the AXP fund returned 47.7%, compared to 36.4% for its peers.
In overseeing the fund, stock pickers Steve Schroll and Laton Spahr and lead portfolio manager Warren Spitz look for medium-size companies whose stocks are deeply undervalued compared to the overall market. They also lean towards companies that pay and increase dividends, and whose returns on invested capital are improving.
The fund’s management team takes a value-oriented approach in running three other funds that focus on large-cap stocks: AXP Dividend Opportunity/A (INUTX), AXP Equity Value Fund/A (IEVAX) and AXP Invest Series:Dvsfd Equity Income Fund/A (INDZX).
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That the AXP Mid Cap Value Fund has a stake in Transocean Inc (RIG) seems fitting. The company drills for oil in the depths of the ocean; the fund concentrates on stocks with rock-bottom prices.
“We really want to emphasize very low valuations,” says Laton Spahr, who helps oversee the portfolio. That’s because data has shown that over the long run, “the cheaper the stocks, the better the returns have been,” he says.
When making investments, the fund’s three managers look for shares priced low relative to the market based on a variety of measurements, like a company’s earnings, book value or cash flow.
Although they’ll own companies with good or bad looking balance sheets, their bias towards inexpensive stocks can lead Spahr and his colleagues to consider businesses whose accounting pictures, at first glance, appear downright ugly. In these instances, they want to see healthy cash flow that can help a company dig itself out of a financial hole.
While the team won’t necessarily hunt for high returns on invested capital, they like to find returns that are improving, Spahr says. Similarly, they’re willing to bet on unprofitable companies, if they think the business will start generating earnings, he says.
The fund can own small and large-cap stocks, but at least 80% of the 100-130 companies that make their way into the portfolio are medium-sized, which the fund’s literature defines as those with market capitalizations of about $1.2 billion to $9.8 billion.
An advantage to owning mid-caps is that they tend not to be followed too closely by Wall Street, so they can appreciate rapidly when big brokerage houses begin tracking and recommending them, Spahr says.
“We love to look for stocks that are either not covered, or ubiquitously hated, by the Street,” Spahr says. If mainstream analysts decide that something should be sold, “there’s a good chance that they’ve mispriced the security,” he adds.
Energy stocks like Transocean are among the managers’ favorites, Schroll and Spahr say, because the shares’ price-to-cash-flow multiples are very attractive. Beyond that, these companies are benefitting from economic growth in many parts of the world, which has spurred demand for oil, they say. The fund has about 13.5% of its assets in the sector, according to Spahr.