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T. Rowe Stock Manager Ignores Trump Mania Delivering 24% Returns

  • Wallack picked as Morningstar’s fund manager of 2016
  • He sees opportunities in defensive and apparel shares

Tune out the noise.

So counsels David Wallack, Morningstar Inc.’s equity fund manager of the year, whose value investing approach returned 24 percent in 2016 when most of his peers trailed the market. While President Donald Trump has whipped a few stocks around with tweets about drug pricing, trade and bank regulation, investors are better off resisting rash reactions.

David Wallack

Source: T. Rowe Price

“Worrying about the ebbs and flows of news on the daily or monthly basis is really not something I found to be productive,” Wallack, 56, said by phone from Baltimore. “It can force you to act when you don’t have to.”

What should you do? It’s not complicated, says Wallack. Look for signals on long-term growth prospects and whether a stock is priced reasonably to book value or earnings. At a time when investors are embracing banks and cyclical shares amid optimism over Trump, the manager of the $13 billion T. Rowe Price Mid-Cap Value Fund sees opportunities in consumer staples and real state investment trusts, shares left behind by the reflation trade.

Apparel makers, pummeled by concern over a Republican border tax proposal, are starting to show value, he says.

The money manager, who started running the mid-cap value fund in 2000, has returned 11 percent a year, beating the 9.1 percent gain in the S&P Midcap 400 Index and 5.5 percent for the S&P 500 Index. He attributes much of the success to his grandfather, who moved to America from England and started investing in the U.S. stock market in 1921.

“One of the things he’d always said to me is, ‘There will be other markets.”’ Wallack said. “What he meant by that is don’t chase stocks, do your work and be very patient. He embodied that philosophy and that’s something I got from him.”

Patience paid off last year in LPL Financial Holdings Inc., a broker-dealer that his team had followed since its initial listing in 2010 but refrained from buying. The fund made the purchase for the first time after LPL lost more than half its value amid disappointing earnings. The stock has more than doubled from its bottom a year ago.

Waiting for the right price can take years, but even harder is the wait for a bullish theme to play out. One example is Viacom Inc., a media company that Wallack’s fund started buying in August 2015 and kept adding throughout last year.

Shares of Viacom fell more than 10 percent in each of the last three years as the company battled declining viewership at several of its U.S. cable channels networks. While the stock is up 20 percent this year, it’s still about half where it was at its peak in 2014.

The market underestimates Chief Executive Officer Bob Bakish’s ability to turn around the company and the value of Paramount Pictures, the money-losing business that had attracted interest from Chinese companies including Dalian Wanda Group Co., Wallack said.

Viacom has the potential to earn more than $5 a share, he estimates. That compares with $3.6 in the latest fiscal year. Last time when EPS exceeded $5 in 2014, the stock reached a record high of $88.94, data compiled by Bloomberg show.

Wallack and his analysts scout companies with a market cap of $2 billion to $20 billion for candidates that have solid growth potentials and capable management. Once they determine a reasonable price, they wait for it to get there, no matter how long it takes. And once the stock is purchased, the fund usually sticks to it. Along the way Wallack isn’t afraid of doubling down should the price fall.

His track record is not unblemished. One investment that didn’t work out in the past few years is Avon Products Inc. The fund bought the stock at “mid-high teens” based on the growth prospects for an established brand. In contrast, the cosmetic company’s model of direct selling came under pressure as consumers shifted buying habits. Avon’s cash fell faster than it could repay debt and Wallack’s fund eventually sold out the stock at a loss.

“Sometimes the stock goes down because the fundamental hypothesis is flawed, but often the price goes down for reasons that have nothing to do with that,” Wallack said. “Just because the price goes down doesn’t mean we sell or get frustrated. It’s once the balance sheet is not healthy that I have the biggest problem.”

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