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November 17, 2004 at 07:00 PM
Quick Take: Peter Spano draws a distinction between statistically inexpensive stocks and those that are undervalued. The latter appear to have the potential to appreciate, because a catalyst is at work, he explains. Those are the ones that Spano wants in the Preferred International Value Fund (PFIFX), which he manages.
In picking stocks, Spano trawls among financially sound companies with little debt. He focuses primarily on large ones in developed countries, but can invest up to 10% of the fund’s assets in emerging markets.
Spano has overseen the portfolio since 1992, and was joined by James Chaney two years ago. Their fund was up 8.4% this year through October, versus a gain of 6.5% for the average international stock fund. For the five years ended last month, Preferred International Value rose 5.8%, on average, versus a loss of 0.8% for similar funds.
The $667-million portfolio closed to new investors on Oct. 29 to keep its assets from reaching the point where they could hurt its performance. However, it remains open to current shareholders.
The Full Interview:
A stock won’t catch Peter Spano’s eye just because it’s cheap.
His interest is piqued when he sees a catalyst, like a new product or a restructuring, that’s likely to transform undervalued shares into overvalued ones he can sell profitably.
To pick stocks for the Preferred International Value Fund, Spano hunts for those priced low relative to a company’s earnings, book value and cash flow over the last three to five years, and based on profit growth projected over five years. He wants equities that are inexpensive compared to their own history and the overall market. Stocks are ranked every three months.
“Really, what we’re asking ourselves is what are we going to be paying for companies today that are going to have excellent earnings five years from now,” says Spano.
Aside from valuations, Spano scans for companies with strong balance sheets and cash flow, little debt, and improving profit margins. The fund leans towards large companies in developed countries.
Spano is willing to put up to 10% of the fund’s assets into emerging markets, however. He describes these investments as “world class” companies that “just happen to have the wrong address, if you will.”
Companies don’t have to be market leaders or buy back their shares to get admitted to the fund, but those that do carry added attraction for him.
About 50 stocks make their way into the portfolio. Spano believes that number provides adequate diversity while enabling winners to make significant contributions to the fund’s performance.
