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Fund Spy

Low-Tech Active Management That Still Has an Edge

These managers still put a lot of emphasis on traditional techniques to beat the broad market.

When BlackRock announced the latest retooling of its equity funds in March, the executive hired to lead the effort said the era of equity portfolio managers working with a handful of analysts in isolation was over. Stock market efficiency and competition from super cheap passive and quantitative options make it difficult for that model to achieve sustainable outperformance, said Mark Wiseman, BlackRock's global head of active equities.

The way forward for active equity managers, Wiseman and BlackRock contended, is to have both quantitative and old-school fundamental teams under one roof, sharing information and techniques.

Even though this is the approach BlackRock has been pursuing to varying degrees with dubious results for at least five years, many in the financial media interpreted BlackRock's equity reorganization 2.0 as a declaration of quantification and another death knell for stock-pickers who rely on traditional gumshoe and green-eyeshade techniques to beat the broad market.

The threats to bottom-up active equity management are real, and it is the rare stock-fund jockey who has not at least attempted to harness technology to refine and streamline his investment process. Yet the death of the old-timey stock selector may be exaggerated. There remain managers whose main competitive advantage is still essentially what Wiseman, BlackRock, and others claim is disadvantaged today: teaming with a handful of analysts to research and cogitate about stocks. Below are a few examples.

 Fidelity Low-Priced Stock (FLPSX), which has a Morningstar Analyst Rating of Silver, has the redoubtable resources of one of the world's largest money managers at its disposal. Manager Joel Tillinghast's enduring competitive edge, however, remains his uncanny ability to hold the fundamental attributes of hundreds of companies in his head at one time. Pick any of the fund's more than 800 stock holdings and there is a good chance Tillinghast, who's aided by a small cadre of analysts who run a slice of the portfolio, can recite how it satisfies the tenets of his quality-plus-value approach. Such intimacy is born of decades of reading, researching, and modeling.

Stephen Yacktman and Jason Subotky of Gold-rated  AMG Yacktman (YACKX) are value investors first and last, but they also consider themselves business analysts who wear out a lot of shoe leather and pencils getting to know the managers, businesses, competitors, suppliers, employees, and financial statements of the companies they add to their concentrated, iconoclastic portfolio.

Bill Nygren relies on the work of Harris Associates' central bank of analysts to help populate Gold-rated  Oakmark Select (OAKLX) but does a considerable amount of fundamental stock research himself. The analyst squad is small and collaborative, and it plies a disciplined form of value investing that relies on individuals to judge companies' intrinsic values so managers like Nygren can in turn use their judgment to buy when the stocks trade at discounts to those values.

There is nothing newfangled or intrepid about Silver-rated  Sound Shore (SSHFX). Its managers Harry Burn, Gibbs Kane, and John DeGulis have employed the same cautious, value-oriented strategy for decades. They look for stocks that are out of favor but not severely impaired or dealing with too many complex issues out of their control. Indeed, the managers often wait for signs of improvement before investing and are happy to forgo initial gains to avoid false starts and value traps. They do use valuation and financial health screens to identify candidates, but a key part of the process remains evaluating firms' competitive positions by speaking with companies' managements, competitors, and customers, and then working up detailed financial and valuation models. 

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