Quick Take: Joseph L. Antrim has chaired the investment committee for the Davenport Equity Fund (DAVPX) since its inception in 1998. In overseeing the $125-million large-cap blend fund, Antrim relies on the diverse and “opinionated” views of his committee to identify leading but undervalued stocks that are likely to rise in value, and that have little risk of falling significantly.
Diversification and making conservative bets helps keep the fund’s volatility low relative to its peers. However, Antrim’s cautious approach hasn’t sacrificed returns. For the three years ended in October 29, the fund gained 5.3%, versus 2.7% for the average large-cap blend fund, and 3.9% for the S&P 500. Over five-year period, the fund gained 0.1%, versus a loss of 2.1% for its peers, and a loss of 2.2% for the S&P 500.
Antrim’s committee members apply both top-down and bottom-up criteria in choosing from a universe of hundreds of large-cap growth and value stocks. Though the percentage of each varies over time, the portfolio is roughly 60% value and 40% growth at present. The portfolio features low turnover, and a low expense ratio of 1.00%, versus 1.15% for its peers.
The Full Interview:
S&P: What is your investment philosophy?
ANTRIM: We’ve been characterized as a large-cap core fund. Our philosophy is to try to make money for our clients, and not to lose money in the process. We don’t have a black box, and we’re not quantitative-type people. Capital appreciation, dividends, value — we’re looking for stocks that go up.
Our benchmark is the S&P 500. To beat it, we need to stay fully invested because historically, the market goes up more than it goes down. Also, we can’t be a quasi-indexer, so 15% or 20% or our names are “outliers” — either they’re not in the S&P 500, or our share is larger than that of the index.
We operate in a very conservative fashion. We consider what could go wrong before dreaming about what could go right. That also keeps us diversified. We try to control damage by not investing too much in one sector or stock.
S&P: How would you describe the way the fund is operated?
ANTRIM: We have a committee of six people with varied interests and knowledge, and we don’t divide their responsibilities by sector. What we don’t want is unanimity of thought — the more opinionated they are, the better.
We meet once a week to go over our folder of buy and sell ideas. We rarely buy or sell a stock right away, but instead put it on a watch list. Later, we vote on it, and majority wins. Also in that folder are discipline items: stocks we own that are down 15% or more from their recent high, or that have reached their target price.
We’ve got 50 holdings, the biggest of which is 3.5%. We usually buy the same amount of every stock, so when something is a big holding it’s because it’s done well. When a stock hits its target price we’ll sell a third and raise the target price on the remainder.
S&P: Who is your ideal investor?
ANTRIM: Somebody who is conservative and interested in preservation. We tend to attract more clients during normal or even bad times. We have some 4,900 shareholders whose average account size is about $25,000 — typically IRA and individual accounts. We don’t have many institutional clients.
S&P: Do you follow the sector weighting of the index? Are there any areas you avoid?
ANTRIM: We try to be in every sector, but don’t follow the index. The S&P is 7%-8% in energy; we’re 11%-12%, and that’s helped us. We think oil prices will come down, but are more bullish than the market as a whole.
Financials are 20.5% of the S&P, our weighting is 16%-17%. In health care, we are slightly underweight.
We are somewhat overweight in consumer discretionary, although Lowe’s is our only retailer. Rather, we have two gaming stocks, Harrah`s Entertainment (HET) and Intl Game Technology (IGT), which represent just under 5% of our holdings. We also own Lauder (Estee) Co (EL).
We’re a little underweight in consumer staples because we haven’t found any reason to make it overweight. In industrials and materials, we’re about equal weighted.
In technology, we’ve always been underweight. We underperformed in the late ’90s because of it. We have no intention of being overweight in technology.
S&P: At the time of the tech boom, what was your thinking?
ANTRIM: We were not comfortable with tech stocks, and still aren’t for different reasons. Back then, it was the fast product cycles — we didn’t know who would be in business tomorrow, or why certain Internet companies were in business to begin with. But now, we see it as a commodity industry whose stock prices still reflect some of the old glamour.
S&P: Is your approach top down at all?
ANTRIM: We pay a lot of attention to top-down stuff, but it’s after we’ve looked at the bottom-up stuff in individual stocks. We’re a mixture of the two.
S&P: What are your buy criteria for stocks?
ANTRIM: There are no hard and fast criteria. We pay a lot of attention to management, and bought Eastman Kodak (EK) about two months ago because management seems to be doing the right things. They’ve been hugely successful in digital photography, and are taking a leading market share in cameras, but still make money on developing pictures. We liked that nobody on Wall Street had a buy on the company.
S&P: Are you typically contrarian?
ANTRIM: Sometimes we are, sometimes we’re not. We try to be a little ahead of the curve, to find a reason for Wall Street to wake up and think like we do. Just because a stock is cheap is not enough for us to buy it.
S&P: What are your sell criteria?
ANTRIM: If the stock is down 15%, we’ll take a hard look at it. We will rarely buy more of a stock that is down. One missed quarter won’t make us sell a stock, but a series of missed quarters will if we can’t see light at end of tunnel.
We sell if we think the fundamentals have changed. We recently sold Coca-Cola Co (KO) because its profit growth had slowed along with new product innovation. They’ve got management problems and have gone through a succession of CEOs.
Nothing will make us sell a stock automatically, except serious litigation liability, which a company cannot control.
S&P: What is your cash position?
ANTRIM: Typically between 5% and zero. If it’s 5%, it’s because we’ve sold something and haven’t found anything to buy yet.
S&P: How do you manage risk in the portfolio?
ANTRIM: By participating in every sector and paying attention to price. None of the valuation metrics in our portfolio are much higher than the S&P 500, most of the time they are lower.
S&P: Are there any recent additions to the portfolio?
ANTRIM: We recently added to International Game Technology, which holds 65% to 70% of the world market for slot machines. A slot machine costs about $5,000 to make, retails for about $10,000, and is very profitable for the casino owner. So there’s a huge profit margin and potential for pricing power.
S&P: Do you any own international stocks?
ANTRIM: We participate internationally primarily through U.S. companies that do business around the world. We have a few foreign stocks — America Movil`A`ADS (AMOV), a Mexican company, is our largest holding. BP p.l.c. ADS (BP) is British, Schlumberger Ltd (SLB) is Dutch. Rio Tintoplc ADS (RTP) is a British company whose primary customer is China — a way to participate in the growth of the Chinese economy.
S&P: What is your outlook for your asset class?
ANTRIM: In the last couple of years, a huge amount of money has flowed out of large-cap into small and mid-cap stocks. That is a cyclical phenomenon. At some point money’s going to flow back into the large-cap stocks — probably not decades from now, but much sooner.
Contact Bob Keane with questions or comments at: firstname.lastname@example.org.