October, 2010 (Bloomberg Markets) -- David Iben’s $589 million ING Value Choice leads the U.S. equities ranking. He’s betting on gold mining and energy stocks.
“We don’t understand why people would strive to look like an index,” says Iben, chief investment officer of Nuveen’s Tradewinds stock funds unit. “We are looking for stocks where we disagree with people.”
Iben, 53, and his team apply that contrarian attitude to the $589 million ING Value Choice Fund, which they manage for Amsterdam-based bank ING Groep NV. When the boom in the stocks of banks and other financial companies hit its peak in 2007, Value Choice shunned them, Bloomberg Markets magazine reports in its October issue. Instead, it put investor funds into gold- mining, metals and coal companies, which as of June 30 still made up more than a quarter of the fund’s assets, and into energy shares, which were another 16 percent.
The result: ING Value Choice tops Bloomberg Markets’ annual ranking of mutual funds that invest mainly in the U.S. The fund returned an annualized 10.5 percent for the five years ended on June 30, even after a 36 percent drop in calendar 2008, according to data compiled by Bloomberg.
The Standard & Poor’s 500 Index declined 0.8 percent in the same period. Value Choice rose 25.9 percent in the year ended on June 30.
Another Iben-managed fund, ING Global Value Choice, ranks No. 2 among global equity funds.
The ranking includes only U.S.-domiciled funds. In ranking the funds, five criteria are given equal weight: total returns for one, three and five years after fees and before taxes and the funds’ Sharpe ratios for three and five years, all through June 30.
The Sharpe ratio measures the performance of a fund adjusted for risk.
Iben was the best U.S. stock picker at a time when the American public was fleeing from the market. The average actively managed U.S. stock fund declined 0.34 percent in the five years through June 30, according to Bloomberg data.
Some of the best-known funds saw negative returns. Fidelity Investments’ Magellan Fund, once the largest U.S. mutual fund, declined at an average annual rate of 2.1 percent over five years. Bill Miller’s Legg Mason Capital Management Value Trust, which beat the S&P 500 for 15 straight calendar years ended in 2006, lost an average of 9.8 percent annually over the five years ended on June 30, even after it rebounded to a 41 percent gain in 2009.
Stock Fund Exodus
Investors pulled $239 billion from domestic stock funds from 2007 to 2009, according to data from the Washington-based Investment Company Institute. Some of that money found its way into bond funds, which, after two stock market crashes since 2000, performed better than equity funds during the past decade.
From 2007 to 2009, an unprecedented $512 billion poured into fixed-income funds.
Top performers in the Bloomberg Markets ranking made contrarian bets. Besides investing heavily in resources, Iben took full advantage of the fact that he’s allowed to invest 35 percent of U.S.-oriented ING Value Choice in foreign equities, including stocks in Canada.
Michael Hasenstab also went his own way. The $37 billion Templeton Global Bond Fund, managed by Hasenstab for San Mateo, California-based Franklin Resources Inc., landed at the top of the global bond category after it sidestepped the debt of struggling nations in Europe, including Greece and Spain.
Too Big to Fail
“The math of their debt metrics didn’t add up, and we didn’t want to hang our hat on the idea that they were too big to fail,” Hasenstab, 36, says.
Instead, he built up a 42 percent position in the debt of developing Asian countries and Australia, which vaulted the fund to a 10.7 percent annualized gain over five years. Templeton Global Bond gained 14 percent in the year ended on June 30.
Hasenstab says he sees opportunities in Asia even as growth in China slows. Economic expansion in Asia’s largest economy eased to 10.3 percent in the second quarter from 11.9 percent in the first as the government began cracking down on speculative property investments and trimming credit growth.
Hasenstab says that even if economic growth in China slows to 8 or 9 percent by the end of this year, it won’t be enough to affect other Asian countries that buy and sell China’s goods.
TCW a Winner
The No. 1 spot in U.S. bonds goes to the $5.2 billion TCW Total Return Bond Fund, run by Los Angeles-based TCW Group Inc., with a 7.5 percent five-year return and a 15.7 percent gain over one year.
During most of the period measured, the fund was managed by Jeffrey Gundlach, who was fired by TCW in December 2009 and now runs Los Angeles-based investment firm Doubleline Capital LP. Gundlach and TCW, now run by Chief Executive Officer Marc Stern, are suing each other, with TCW accusing Gundlach of stealing trading and contact data for its clients and Gundlach alleging he was ousted so Stern could take control of fees earned by his funds.
Assets in TCW Total Return have slumped 57 percent from almost $12 billion since Gundlach left. Still, Total Return advanced 6.2 percent this year as of June 30 under its new team led by Tad Rivelle, beating 85 percent of similar funds, according to Bloomberg data.
The fund outperformed by profiting from a bet on distressed mortgages. Rivelle, who oversees portfolio managers Bryan Whalen and Mitch Flack, says the fund has 35 percent of its assets in nonagency mortgages -- that is, loans not backed by Fannie Mae and Freddie Mac or the Federal Housing Administration.
He says they’re cheap at about 45 cents on the dollar and have the potential to climb further.
“It is a relatively unlevered and effective way to invest,” he says.
In stocks, Iben’s strategy involves buying shares of companies that he believes are selling at lower prices than their intrinsic worth, based on projected earnings, sales or, in the case of mining companies, the amount of extractable ore in the mines they’re operating.
Iben and his team of 14 research analysts crunched the numbers for gold-mining companies and concluded that various companies’ stocks were underpriced even as the metal’s price, at $1,245.85 an ounce on Aug. 31, flirted with its June 21 all-time high of $1,265.30.
“The price of gold stocks hasn’t kept up with the price of the metal, allowing us to buy at attractive prices,” says Iben, who oversees about $9 billion in global portfolios at Nuveen.
Newmont, Barrick Gold
Among his top gold stock holdings are Greenwood Village, Colorado-based Newmont Mining Corp., the largest U.S. gold producer, whose shares advanced 31 percent this year through June 30, and Toronto-based Barrick Gold Corp., the world’s biggest gold producer, whose stock was up 15 percent this year.
One of ING Value Choice’s favorite stocks is Lihir Gold. Iben says its mine on Lihir Island, 900 kilometers (560 miles) northeast of Port Moresby, Papua New Guinea’s capital, contains one of the biggest deposits of the precious metal ever discovered. When Iben traveled to the island four years ago to look at his investment, it took him more than two days to get there from California.
“It was really remote,” he says.
Iben says the market didn’t recognize the value of Lihir’s shares when he started buying them half a dozen years ago. Delayed production and higher-than-expected costs had pushed the shares down to about A$1. The stock has since quadrupled.
Lihir in May agreed to be purchased by Melbourne-based Newcrest Mining Ltd. for A$9.7 billion ($8.8 billion).
Iben is a native of Washington, D.C. His family moved to California when he was 7. He started his investment career after earning a Master of Business Administration from the University of Southern California, and got his start managing money at the investing unit of Los Angeles-based insurance company Farmers Group Inc. before joining Nuveen in 2000.
A bet on emerging markets is a common theme that runs through top-ranked funds that have the flexibility to invest around the world. The MSCI Emerging Markets Index rose at an average annual pace of 13 percent during the past five years, with stocks in developing Asia and Latin America rebounding from 2008 losses as those regions’ growth rates outpaced Japan and the West.
Developing markets such as South Korea, Malaysia and Indonesia also have low debt burdens compared with developed nations, Franklin’s Hasenstab says.
Christopher Arbuthnot, lead manager of the John Hancock Global Opportunities Fund, is one of those emerging-market investors. His fund ranks No. 1 in global equities; it was up an annualized 10.2 percent over five years and 30.7 percent in the year ended on June 30, according to Bloomberg data.
The John Hancock fund is owned by Boston-based MFC Global Investment Management, a unit of Toronto-based Manulife Financial Corp., which acquired John Hancock Financial Services Inc. in 2004.
Arbuthnot, 36, runs a concentrated portfolio with about 45 stocks. He has 34 percent of the fund in emerging markets such as Brazil, India and Indonesia. This year, he’s added to his stake in OGX Petroleo & Gas Participacoes SA, the Brazilian oil company controlled by billionaire Eike Batista.
Arbuthnot made the stock one of his biggest holdings after it had lost more than three-fourths of its value over a four- month period following its initial public offering in June 2008. He says the plunge was based on worries of a slowing global economy and declining oil prices.
Proposed oil industry regulations by the Brazilian government and a federal probe into the finances of another company owned by Batista, which was later dropped, also pushed down the share price. OGX shares, which fell to as low as 2.62 reais, tripled in value in 2009 as the company disclosed its biggest discovery, an offshore well that may hold up to 2 billion barrels of recoverable oil.
“In the emerging markets, we look for the Batistas of the world,” Arbuthnot says. “Billionaires are billionaires for a reason.”
The No. 1 fund in the emerging-market equity category is Oppenheimer Developing Markets, managed by Justin Leverenz for New York-based OppenheimerFunds Inc. The fund rose an annualized 14.8 percent over five years and 27.1 percent for the year ended on June 30.
This was Leverenz’s second consecutive year at the top of the emerging-markets ranking.
Leverenz’s top holdings include Russian retailer Magnit OJSC, which surged 40 percent this year as of June 30, and Brazilian cosmetics company Natura Cosmeticos SA, which advanced 32 percent. Leverenz has about 14 percent of the fund in Brazil and another 14 percent in India, plus 10 percent in Mexico.
During the next three to five years, developing-market stocks will have “stunning” returns, he predicts, while growth will remain sluggish in Europe and the U.S.
“The supermajority of the world’s growth will come from these markets,” he says.
Leverenz looks for stocks he thinks are misunderstood by investors, as well as companies beset with temporary troubles. Last year, he added to his stake in Mexican wireless-phone carrier America Movil SAB when its shares dropped after it announced plans to acquire Brazilian phone operator Telmex Internacional SAB.
Movil Shares Rise
America Movil shares climbed 18.6 percent this year through Aug. 9, after hitting their 2010 low of $42.94 on Jan. 25.
In U.S. equities, last year’s top performer, the Yacktman Fund, run by the father-and-son duo of Donald and Stephen Yacktman, ranks third this year. Their Yacktman Focused Fund is No. 2, with a 20.1 percent return for the year ended on June 30 and a 7.3 percent return over five years.
The fund was helped by its value-minded managers’ avoidance of financial stocks and a 30 percent slug of cash during the worst of the credit crisis. This year, the $1.3 billion Yacktman Focused has bet on blue-chip U.S. companies such as PepsiCo Inc., Coca-Cola Co., Johnson & Johnson and Procter & Gamble Co.
Also among the top 10 is the $14 billion Fairholme Fund, managed by Bruce Berkowitz, who earlier this year won Morningstar Inc.’s Stock Fund Manager of the Decade award. Berkowitz guided his fund to a 6.7 percent annualized return during the past five years after investing in companies generating cash and, like Iben, trying to outshine the indexes.
Iben says the volatility of the market since 2008 has allowed him to pick up stocks at bargain prices. Yet he’s quick to point out that price isn’t his only criterion.
“Valuation is the prerequisite, but we aren’t just looking for cheap stocks,” he says. “We’re looking for good companies.”
And as his Lihir Island investment illustrates, it doesn’t matter where they are.