Manager goes against the grain, buying companies analysts say to avoid
Ty Nutt, the lead portfolio manager of the Delaware Value Fund (DDVAX), likes to bet against analysts.
His fund's portfolio of 33 large-cap stocks, with holdings including Broadcom Corp. (BRCM), Cisco Systems Inc. (CSCO) and Johnson Controls Inc. (JCI) often buys into companies when Wall Street recommends otherwise. The fund also maintains an annual stock turnover rate of less than one-third of its portfolio.
The fund generated a one-year annualized return of 23.3% through the end of August, net of fees. In the past three years, returns averaged above 20%.
InvestmentNews: What are the basics of your investing approach?
Mr. Nutt: Our strategy has a 35-year history. I started in 1978 at a different firm, in the asset management portion of Merrill Lynch [& Co. Inc.]. I moved with the team to Delaware, and I've been with the strategy since '94. We do believe market psychology is extremely important — just as important as fundamentals. When there's a lot of pessimism surrounding the shares of a very fine business, the share price gets very depressed. When we see a gap between the current value and the intrinsic value, that's our opportunity.
InvestmentNews: What are some of your favorite stocks and securities right now?
Mr. Nutt: Our most recent purchase was Broadcom. It's been a very fine tech stock over the years. The stock has underperformed for the last three years. It's generally a popular name with analysts, but it has underperformed. What happens with these stocks, [is that they get depressed] to low [price-earnings] ratios because of the pessimism surrounding them. We see a great business that can easily expand.
Johnson Controls has been hit on hard times, and it's a much more cyclical business. We think it's undervalued and has lots of potential long-term, especially with its exposure to China and the growing commercial construction that can grow the business.
We have lots of energy names.
InvestmentNews: Can you speak more in-depth about the role that market psychology plays in your investment strategy?
Mr. Nutt: We're looking for shades of gray in terms of the optimism and the pessimism. We take a three- to five-year view when looking at investments, and we're willing to buy when others say, “Don't buy.” Typically, Wall Street analysts are 60% or more “hold” or “sell” ratings [on a stock] at the time that we're buying.
For example, we sold Comcast Corp. (CMCSA) in order to buy Johnson Controls. Comcast had a 70% “buy” rating and had done extremely well for us. It was up 140% for us from our purchase price. Things were going extremely well, but … it reached what we thought was fully valued. We purchased Johnson Controls when only 38% were in favor on Wall Street. We're willing to be patient. We try not to be affected by emotions, and we make team-based decisions.
InvestmentNews: What do you see in terms of trends in large-cap stocks?
Mr. Nutt: Our view of the current market, and the way we're positioning based on that view, is that we think we're still in a secular bear market. That began in March 2000. Essentially, the market has made no progress since then.
InvestmentNews:How do you set yourselves apart from other large-cap investment funds?
Mr. Nutt: There are other great value investors. We're simply trying to be very good practitioners in this value-investing space. One factor is the one I mentioned, that we have this democratic approach so it's not a single decision maker. We think we have greater wisdom that way than we have with any one of us along. It helps us hang in there with good businesses for the long term.
We have a 10-factor screen that a stock must pass. It's a way of ensuring that we have a statistically inexpensive [portfolio]. We have 33 securities, currently. We'll always be between 30 and 40. We don't want to be the index. We want to be a “best-ideas only” portfolio.
