Better Opportunities Outside Financial Sector
Queens Road manager Steve Scruggs thinks the risk/reward trade-off in financials is less attractive than in other sectors.
John Coumarianos: Move on to the large cap fund a little bit as I mentioned before you were light on financials back in '08. Take us through your analysis and the process that made you realize to you that banks maybe not so healthy?
Steve Scruggs: Well, it's interesting because we benefited a lot from the run-up in the banks because we did own – we owned AIG, we owned Citigroup, Bank of America…
Coumarianos: And you're based in Charlotte where Bank of America is of course.
Scruggs: But as 2007 played out into 2008, it was clear there were structural problems in the banking industry and related primarily to residential lending. And as we ran the numbers, the most degree just when we saw was with Wachovia in the Golden West acquisition and we saw – we did some – it wasn't too terribly complicated analysis to realize what the underlying portfolios of their loans were based on and that was based on negatively amortizing undocumented loans.
From there we started to look with a very skeptical mindset at others and we got to a point where either what we saw was bad or what we saw we couldn't figure out. And Citigroup and AIG are great examples of that. So, we got out and that did – that really helped us in '08 and early '09, but as you've seen, they have roared back as though everyone has forgotten and everything is going to be great, and hopefully it will, and as long as interest rates – at least their source of funds stays low, I think they're going to continue to earn a lot of money. And hopefully they'll do well, but the risk return from the risk/reward from our perspective, we see a little bit better opportunities elsewhere.
Coumarianos: Okay. And it looks like one of those opportunities where you see some possibility for making money is the media sector, where the large cap fund is a little bit over-weighted on your top holding, I believe is, News Corp there. I was wondering if you could talk about that and the thesis for that a little bit?
Scruggs: Well, it's kind of a bit contrarian play that we hope that the cycle there. They're coming out of the lows with the cycle and even where we kind of see them being in the cycle, what the valuations are, typically the bottom of the cycle, you would imagine PE used to be above average for an individual company and at the top of a cycle. They would be below average and – what we think hopefully closer to the bottom of the cycle with a below average PE. So as they come out, hopefully earning to grow and the multiples will normalize.
Coumarianos: Excellent. Well Steve, thanks so much for joining us in Chicago for our conference this year. We really appreciate it.
Scruggs: Thanks a lot. Nice to be here.
John Coumarianos does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.