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Fund Spy

Did You Notice These New Sector Bets?

Three funds that have seen big shifts in sector allocations in the past three years.

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The article was published in the September 2014 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.

Change can creep up on fund investors. Occasionally managers will make big sector shifts that you wouldn’t want to miss. The moves can alter the risk profile of the fund and your portfolio, so it pays to pay attention.

Below are a few funds that have upped their stakes in certain sectors in the past three years. Bottom-up stock-pickers run each of these examples; none of them would say they’re making conscious bets on particular sectors. Because these fairly concentrated, benchmark-agnostic managers are comfortable letting their stock picks gather where their research leads them, the funds often end up making de facto sector wagers anyway. It’s worth keeping an eye on.

 Jensen Quality Growth (JENSX) is known for its stringent profitability criterion. So, it was surprising to see that the fund had increased its basic-materials stake from 1.4% in 2011 to more than 11% of stocks as of June 2014. Basic-materials companies, miners and those dealing in commodities in particular, aren’t exactly known as bastions of quality; many struggle to earn their cost of capital. Jensen’s stake consists of a big chemical company benefiting from positive secular change and two industrial-service companies with strong positions in their markets.

The fracking revolution has lowered the cost of one of the key inputs of  DuPont’s (DD) chemical-manufac­turing process--natural gas. And industrial gas company  Praxair (PX) and environmental-services company  Ecolab (ECL) have business models that generate a lot of recurring revenue. Arguably these are higher-quality basic-materials companies, but Jensen’s increased exposure here still bears watching.

For-profit education companies make up virtually all of  FPA Capital’s (FPPTX) increased consumer defen­sive stake, which went from next to nothing to 11% of stocks in the past three years. Although the stocks have recovered from controversies over enrollment growth, job placement rates, and aggressive marketing tactics, they remain contentious. FPA Capital managers say concerns, investigations, and determined short-selling by hedge funds gave them the opportunity to buy leaders in a key component of the U.S. education system at attractive discounts. DeVry Education Group (DV) is best-of-breed in an oft-troubled industry, with strong and effective franchises in test prep and information technology, accounting, and medical-services training. Meanwhile,  Apollo Education Group (APOL) has abundant opportunities to improve its cost structure and margins by focusing on student retention and licensing its technology to other schools seeking to offer classes online. The positions have paid off for the fund so far, but they can be volatile and controversial.

 Delafield Fund (DEFIX) is usually more comfortable in industrial and technology sectors, which typically have consumed the bulk of their investments. Managers Dennis Delafield and Vince Sellecchia, however, also seek companies that look cheap because of failed acquisitions, management upheaval, or aborted strategies. In recent years, they’ve found a lot of those in the energy sector. The fund’s commit­ment there has increased from nothing to 10% of stocks in the past three years as it has snapped up coal firm  Consol Energy (CNX), oil- and gas-services and equipment companies  Weatherford International (WFT), McDermott International (MDR), Boardwalk Pipeline Partners (BWP), and others. 

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.