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The phrase “large-cap value stock” seems to be an oxymoron. After all, large-capitalization stocks usually aren’t cheap, while value stocks are supposed to be inexpensive based on key measures such as their price-to-earnings ratio. The challenge facing portfolio managers who run large-cap value funds, then, is to balance buying large companies that are cheaper than their peers.
And according to market observers, it’s a tricky high-wire act. The portfolios of professional investors who strayed from the standard definition of value did better than those who adhered rigidly to that style.
“Some of these managers have been referred to as the New Age value investors,” says Scott Cooley, senior analyst at Morningstar, a Chicago mutual fund research firm. “There’s been a lot of difference [in the performance] between those kinds of investors and those that focus on traditional value models.”
Being a nouveau value investor and scooping up semiconductor stocks when their prices were depressed helped senior portfolio manager Bret Stanley propel the $117 million AIM Basic Value Fund (Nasdaq: GTVLX) to the top tier of large-cap value funds.
“One of the big reasons we’ve outperformed other funds is we took advantage of the sell-off in semiconductor stocks,” says Stanley. In fact, at one point the fund had about 15% of its assets in technology stocks, and 10% in semiconductor stocks alone.
Stanley says the fund also bought select oil services stocks when they were down, in particular drilling companies such as Schlumberger (NYSE: SLB), Transocean Offshore (NYSE: RIG) and Ensco International (NYSE: ESV), expecting a rebound in that sector.
The AIM Basic Value fund achieved a cumulative year-to-date total return of 17.76%, far ahead of the average 4.77% return of other large-cap value funds, according to Morningstar.
Meanwhile, at least one unusual portfolio cracked the top tier of large-cap value funds: the $110 million Strong Dow 30 Value Fund (Nasdaq: SDOWX). It’s essentially an enhanced index fund based on the Dow Jones industrial average, run by co-managers Charles Carlson and Richard Moroney.
Carlson explains that 50% of the fund is directly indexed to the Dow. The other half is actively managed, with certain stocks either overweighted or underweighted in the portfolio, depending on factors such as whether they make traditional value screens like dividend yield and price-to-earnings growth. For example, while Merck (NYSE: MRK) might not be considered a typical value stock, it has been beaten down, so its price relative to its future earnings potential makes it a less expensive drug company to own, he says.
In some cases, however, if a Dow stock is expensive but has good future earnings potential, they’ll probably own it, Carlson says. Take Home Depot (NYSE: HD), one of the four stocks recently added to the Dow. Carlson says that at its current price, Home Depot “is not a good value but it has strong earnings growth, so you know you don’t want to get in front of that train” or miss owning a fast-growing company. Naturally, when Dow Jones & Co. announced it was dropping four stocks and adding Home