Financial market insight from your mutual fund managers

One of our primary jobs is assessing mutual fund managers to look for those who can provide good results.

Understanding what your mutual fund managers are thinking is an integral part of our research effort on your behalf, and given the current onslaught of news and opinions on the economy and the markets, we thought it would be helpful for you to hear from a few of your funds’ managers.

Under the Hood: Behind the Scenes With Your Mutual Fund Managers

Davis NY Venture, which invests in large US holdings, looks for companies that have “wide moats” separating themselves from their competitors. The fund holds a total of 109 positions with some of its top holdings including Costco, Berkshire Hathaway, JP Morgan Chase and ConocoPhillips. The managers look for stocks with solid balance sheets and defensible market niches that trade below what industry analysts think they’re worth.

When I first started investing, my grandfather gave me a card on which was written,’ You make most of your money in a bear market, you just don’t realize it at the time.’ Although at first blush this saying sounds counterintuitive – after all, in a bear market prices are going down – it makes sense when you recognize that as investors we are buyers and thus should welcome lower prices for the simple reason that lower prices may increase future returns.”

“In today’s bear market, investors are racing for the exits. Cash is pouring into ‘riskless’ securities like short-term U.S. Treasuries with virtually no yield. Although such a choice feels good, it is, given the near certainty of inflation, likely to prove very costly. Meanwhile, investments in high grade common stocks, which feel like a terrible choice, are likely to prove very profitable and are almost certain to outperform cash over the next decade.

Christopher C. Davis
Davis NY Venture

Baron Growth Fund could be described as a ‘Homerun hitter’ type of investment. The management here likes to discover stocks that can double their price over the next 4-5 years. They are also fond of quality management, which they evaluate by developing relationships with executives of the companies in which they invest. Some of the holdings they currently like include Devry, Strayer, Dick’s Sporting Goods and Arch Capital Group. The fund has been a solid choice for us in the small and mid-cap area over the years.

Among the most important beneficiaries of President Eisenhower’s program to build an interstate highway system in the 1950’s were not the contractors and materials suppliers but businesses like roadside restaurant McDonald’s, roadside hotels like Holiday Inns and destination resorts like Disney. When President Kennedy set a national goal for America to send a man to the moon and bring him back before the end of the 1960’s, the beneficiaries were not only the defense contractors who made the rockets and supplied fuel. Communications companies, semiconductor fabs, other technology businesses and something called the Internet were the true long term beneficiaries. Similarly, we think President Obama’s infrastructure, alternative energy and energy conservation programs could provide opportunities for many new industries like electric and battery driven cars, more efficient power grids and producers of new composite materials with unusual characteristics that can be used in windmills and by the turbines that drive them. It is our job to find beneficiaries of President Obama’s program in which we can invest.

We think that when the worldwide economic recession begins to recede, the mountains of cash on the sidelines invested in “safe” government securities providing no yield held until “the coast is clear” will not prove a good idea either. We think it may then be just as difficult to buy stocks as it was to sell them only a few months ago.

Ron Baron
Baron Growth Fund

Cambiar Opportunity is one of our more concentrated funds which generally holds 30-40 stocks at a time. They focus on mostly large US companies that are cheap when compared to their peers and the market. The fund had a rough ride down this latest bear market but holds one of the best 10 year returns in their category beating the S&P 500 by nearly 5% and has been particularly impressive since the November lows. Some of the funds top holdings include BP Amoco, El Paso Corp, Allstate, and CVS.

There will be no all clear horn sounded when the crisis abates and when risk premiums begin to fall, but markets will quickly take notice. Timing an improvement in the stock market will be very difficult. Nonetheless, an analysis of risk premiums suggests the case for investing is very strong now.

In this and other areas of the market, we have thus taken some advantage of the profound price dislocation to “quality-up” our portfolio at valuations that we could only have dreamed about a year ago. Similarly, we have initiated positions in a number of core franchises within the media, consumer, and healthcare industries who have undergone significant value dislocations. While media, energy, and retailing may not jump out as being uniquely poised to perform owing to varying degrees of cyclicality, and health care may not be uniquely attractive under the auspices of a Democratically-controlled government, the valuation compression is just astonishing. Many energy companies have reverted to 1999-2001 stock prices, and though oil prices have fallen, we are far from the $10-20 level that prevailed at that time. Similarly, while advertising and consumer spending looks sure to contract, profit declines of as much as 60-70% are now baked into valuations – this too seems grossly excessive.

Brian Barish
Cambiar Opportunity Fund

Special Notes:
* Your portfolio may not contain these specific funds. We recommended the funds in your portfolio based on your risk profile and goals.
* All comments from mutual fund managers were taken from their most recent shareholder letters.

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