Not every investor is chagrined by the dismal way the year has started in stocks. Some, like self-described value manager Rupal Bhansali, are gleefully loading up on companies that got beaten down when the whole market sold off at the start of the year. Bhansali, whose Ariel International Equity Fund had been socking away cash for just such an occasion, says she is buying in the most battered areas, including the one identified most often as the reason for the current market selloff: China.
"We're finding value in volatility," said Bhansali. Her fund is one of just three US large-cap value funds tracked by Morningstar Inc to deliver positive returns over one year after last week's broad market decline. "We have a very large pond to fish from." She is buying shares of China Mobile Ltd, down 13 percent over the last year. She said she expects the massive wireless carrier likely will blossom as consumers there take on data plans and gain internet access for the first time.
She is also buying Microsoft Corp, to her more of a "staple" than a risky technology stock, and Dialog Semiconductor Plc, which she sees as a strong balance sheet bet even though it supplies tech giant Apple Inc, which is facing concerns about slower iPhone sales growth. Other value managers are also adding to existing positions and scooping up new finds after US and global stocks started the year with historically large declines.
The average actively-managed large-cap fund ended 2015 with 2.6 percent of its portfolios in cash, about 73 percent more than the 1.5 percent they held the year before, according to Lipper. They have put a broad array of beaten-down sectors, from banks to retailers, in their sights. If these buys pay off, it will be a turnaround for the value investment style, which favors stocks that have lower prices relative to earnings and assets.
In 2016, high-priced growing companies like Amazon and Netflix rewarded investors. Large-cap value funds lost 4.1 percent in 2015, versus a 3.6-percent gain for large-cap growth funds, Morningstar reported. With $371 million in new inflows last year, the $1.3 billion Smead Value Fund, has been aggressively deploying cash to buy more of companies it may have picked up on the early side. The fund gained 1.5 percent in 2015.
"This past week has been cheapening up stocks that we think are going to continue to do well for us," said Cole Smead, a co-portfolio manager. His fund has been adding to positions in retailers such as Nordstrom Inc and Tegna Inc, the broadcasting and digital companies spun out of newspaper publisher Gannett Co Inc. He is also looking at adding to Bank of America and American Express, which now makes up one of the largest positions in his fund at 4.5 percent of the portfolio, he said. Both should benefit from rising interest rates.
Smead initiated its position in American Express during the mid-2015 selloff sparked by concerns about China, and has been adding to it steadily since then. To be sure, there is risk in these contrarian strategies. Adding to positions, such as American Express, that have sold off comes at the risk that they may continue to fall. Bhansali said that even after the selloff she is having trouble finding consumer staples and energy stocks that have sold off enough to make them attractive.
Bryant VanCronkhite, portfolio manager of the $2.3 billion Wells Fargo Special Mid Cap Value Fund, said he has been adding to positions in energy and industrials companies that have "terrible" stock performance, he said.
One contrarian pick: Eagle Materials Inc, whose shares have fallen 11 percent year-to-date, and 25 percent over the last three months, largely because of its business providing sand for use in fracking wells. Yet the company also had a strong cement business, he said, and healthy fundamentals including a strong balance sheet that will allow it weather a downturn longer than competitors. For VanCronkhite, the pessimism presented an opportunity. "We've been able to defend positions and build new positions in names that we were waiting on a price on," he said.
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