A Harder, Tougher Hunt for Value
Surveying the market, Denis Amato, who runs the Fifth Third Multi Cap Value fund (MXSEX ), thinks prices may have run too far ahead. He says it's harder to find stocks to buy. Instead of looking for sizzle, Amato focuses on a stock's normal, or reasonable, prospects based on the underlying company's history, industry, and present conditions.
Fifth Third Multi Cap Value is enjoying sizable gains in this year's rally, while also building up a respectable record for the difficult market of the last three years. This year through Sept. 17, the fund rose 25.1%, vs. 18% for the Standard & Poor's 500-stock index. For the five-year period through August, the fund gained an average of 12.5% a year, vs. 2.5% for the index.
Based on risk and return characteristics, Standard & Poor's gives the portfolio its highest rank -- 5 Stars. Bill Gerdes of S&P's Fund Advisor recently spoke with Amato about the fund's strategy. Edited excerpts from their conversation follow:
Q: What is your overall investment strategy? A:
Q: What is your overall investment strategy?
A:We're a basic value fund that focuses on a company's normalized returns and normal earnings power. Rather than play the earnings surprise game, we take a long-term approach and try to determine a company's value based on its total assets, including cash. To forecast a company's normalized returns, we look at its history, its industry, and its current conditions to find what we believe its return on equity will be going forward. This earnings outlook helps us decide what a reasonable multiple would be.
Q: As a multicap fund, how do market capitalizations figure in your investment decisions? A:
Q: As a multicap fund, how do market capitalizations figure in your investment decisions?
A:We take a bottom-up approach, but we may focus on certain market areas, based on capitalization, if we find more value. It's an evolving thing, rather than an overnight decision.
Q: How is the fund currently positioned in terms of market capitalization? A:
Q: How is the fund currently positioned in terms of market capitalization?
A:The fund is generally balanced in terms of market caps. Our market caps haven't changed a whole lot this year, although they may be higher because the market is up, in general, this year. We're willing to go where the right value is and aren't constrained by a particular market capitalization.
Averages can be funny, though. Our average market cap may be misleading. We probably have a medium market cap, although a few large companies may have boosted the average market cap. These large companies include some drug companies and a couple of oil companies, including ChevronTexaco (CVX ).
Q: What are your criteria for selling holdings? A:
Q: What are your criteria for selling holdings?
A:We develop price targets which end up being our sell targets as well. Once a stock reaches full value, it becomes a candidate for change or sale. We also look at technical action to decide on possible sales.
Q: What's your view of the current market based on technical analysis? A:
Q: What's your view of the current market based on technical analysis?
A:The market may be ahead of itself. It's getting easier to find things to sell and harder to find things to buy. There are also signs of more insider selling.
Q: What's your outlook for the market? A:
Q: What's your outlook for the market?
A:The market probably won't be as good for the rest of the year as it has been so far this year. We're likely to see more steady returns, not the returns of the 1990s.
Q: What are the fund's largest sector positions? A:
Q: What are the fund's largest sector positions?
A:Consumer discretionary, information technology, and health care are our largest sector weightings. These weightings are less of an economic call than where we're finding earnings power. We've reduced our financial services weighting because interest rates will probably drift higher. In the consumer discretionary sector, we hold retail, restaurant, and entertainment stocks. A lot of tech stocks had looked awfully cheap, based on their book values, but we've started to lighten up in that area.
Q: What is your view of recent questions raised about unfair market-timing of mutual funds? A:
Q: What is your view of recent questions raised about unfair market-timing of mutual funds?
A:It's surprising that people would do that. We have never been involved in anything like that. We try to make sure that all shareholders are treated the same way.