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A proven manager's steady use of a distinct strategy earns Columbia Contrarian Core a Morningstar Analyst Rating of Bronze.
Manager Guy Pope and his small but experienced team are contrarians, but this isn't cigar-butt investing. Pope invests in companies with above-average market pessimism where he thinks catalysts exist that will change that sentiment in the next 12-24 months. He screens firms with market caps above $2 billion that are trading in the bottom third of their 52-week range and avoids companies with big secular headwinds or permanent impairments. Pope's core team of three analysts first run fundamental analysis on these firms, then leverage Columbia's central team of fundamental industry and quantitative analysts.
A disciplined sell philosophy yields a careful review of underperforming holdings and consistent rebalancing into firms the team thinks have higher upside. Any stock that drops 15% relative to the benchmark is trimmed a third and reviewed as if newly screened. Winners are systematically trimmed as well. Pope bought AutoZone (AZO) in August 2017 after the stock stumbled on concerns Amazon (AMZN) would encroach on its market. But Pope believed the dip would be short-lived because of the firm's strong position among do-it-yourself customers who value the retailer's onsite inventory and knowledgeable staff. The stock rebounded off its lows, triggering an outright sale in the fourth quarter.
The strategy has struggled lately, but strong stock-picking has generated a good long-term record. Since Pope took over in March 2005 through December 2018, the strategy's annualized return of 9.2% outpaced the Russell 1000 Index's 8.0% return. The portfolio has been more volatile than the benchmark as it holds positions with more near-term negative sentiment, but over the long haul, it has held up better by staying fully invested and diverging from the index when market anxiety provides opportunities. Under Pope, the upside-capture ratio of 105.3% beats the Russell 1000 and 87% of category peers, and the downside-capture ratio is line with the benchmark.Process Pillar: Positive | Tom Nations 02/06/2019
Manager Guy Pope's disciplined approach relies on strong bottom-up stock selection to identify contrarian opportunities. Consistency throughout Pope's tenure justifies a Positive Process rating for the strategy.
Pope narrows the investment universe with a straightforward screen. Stocks with market caps of at least $2 billion trading in the bottom third of their 52-week price range are flagged for review. This screen outlines an important part of Pope's form of contrarianism; investing in companies trading with heightened pessimism. Pope and his three-person analyst team conduct fundamental research on the narrowed universe. Pope invests in both value and growth, but his focus on quality companies with issues deemed temporary or that he thinks are being overemphasized by the market gives the portfolio a growth tilt.
The $2 billion market-cap minimum means Pope can enter small-cap positions. But lately, he's seen more opportunity in large firms, shifting the portfolio's market cap higher. The strategy's asset size also requires higher conviction and a longer time horizon when buying small-cap positions.
Pope's preference to stay fully invested means he'll buy positions on the way down, resulting in higher volatility than the benchmark and category average. Outperformance over Pope's tenure thus drives top-decile risk-adjusted returns, as measured by Sharpe and Sortino ratios.
Columbia's central research team of 24 fundamental industry analysts and four quantitative analysts supplements the quality approach here. Based on its average Morningstar Economic Moat rating, the portfolio has historically held more firms with competitive advantages than the typical peer in the large-blend Morningstar Category. As of December 2018, the strategy's underlying positions held less debt and had higher margins than both the benchmark and peer average.
Manager Guy Pope regularly meets with company management teams in an effort to identify hidden value waiting to be unlocked. He bought State Street (STT) in late 2018 after meeting with its new CEO. His confidence in State Street's competitive advantages was reinforced by refocused initiatives at the wide-moat company.
Pope and his team prepare best- and worst-case exit strategies for new positions. Pope also maintains a "down 15% rule," which triggers an automatic sale of a third of a holding if it falls more than 15% relative to the Russell 1000. He tries to keep the team objective by conducting a fresh review of the stock after a one-month hiatus.
Pope has the flexibility to differ sector weightings by up to 900 basis points from the Russell 1000 Index but has recently kept sector bets modest. He has historically leveraged this elasticity during periods of increased pessimism, most notably during the bear market of 2007-09 and the eurozone debt-crisis correction in 2011.
Performance Pillar: Positive | Tom Nations 02/06/2019
Despite recent hiccups, the strategy's impressive returns under Guy Pope earn it a Positive Performance rating.
Since Pope took over March 2005 through December 2018, the strategy's rolling five-year returns landed in the category's top quartile 91% of the time. It gained 9.2% annually under Pope, outpacing the Russell 1000 by over 120 basis points per year and beating 98% of large-blend peers.
The strategy has excelled in prolonged down markets and subsequent recoveries. From the start of the financial crisis in October 2007 through April 2010, it beat 95% of its peers. Pope moved to underweight financials in early 2007, then piled into financials stocks at lower valuations after the Fed announced the quantitative easing program in 2008. The strategy also had a top-decile finish from October 2011 to May 2015 following the eurozone debt-crisis correction.
The strategy can lag for stretches as some holdings remain out of favor. The strategy has underperformed in three of 14 calendar years under Pope, including two of the past three years. Negative sentiment caused top holdings Facebook (FB) and Philip Morris (PM) to drag on performance last year. The December 2018 market correction provided Pope the opportunity to adjust the portfolio, as over 1,000 stocks passed through the initial screen.
People Pillar: Positive | Tom Nations 02/06/2019
This strategy benefits from a tenured manager and experienced supporting analysts, earning a Positive People rating. Guy Pope joined Columbia Management in 1993 and has served as lead manager of the strategy since March 2005. Pope's contrarian approach predates his tenure on the strategy, as he has employed the same process running the equity sleeve of Columbia Balanced (CBLAX) since 1998.
A small but seasoned group of analysts supports Pope. Nick Smith, Harvey Liu, and Mike Welter are trained by Pope to be generalists but have prior sector-specific experience. The group has been stable. Liu was the most recent member to join the team in 2010 but has industry experience dating back to 1996. Pope relies on the analysts to defend a current holding's upside potential and to uncover new opportunities.
Pope augments his team's research with insight from Columbia's central pool of 24 large-cap fundamental analysts and four quantitative analysts. Those analysts often follow the same large-cap stocks that interest Pope. The team also relies on their ability to skillfully interview company management.
Pope aligns his interests with shareholders by personally investing more than $1 million here.
Parent Pillar: Neutral | 04/11/2018
Columbia Threadneedle's lineup covers a lot of ground. The equity fund roster includes both fundamental and quantitative funds. Boutique teams still dominate the equity lineup globally, but the firm has also renewed its efforts to capitalize on its central research team. The fixed-income lineup is conservatively positioned with an indistinguishable approach generally. The bond team had some surprise departures at the end of 2017, but key personnel remain with the firm. Fund launches have slowed, but so have fund closures. Redundant offerings remain, and the firm's lineup is among the industry's largest. Broadly, fees and manager ownership levels are disappointing. Overall, standard fundholder practices support a Neutral Parent rating.
Columbia Threadneedle's culture has some strengths. Global CIO Colin Moore allows portfolio managers significant independence, and particularly strong strategies continue to succeed. Global reach and solutions-based products remain top priorities. Indeed, Jeff Knight's solutions and allocation team benefits from significant resources. U.K. equities and high-yield also impress. But assets managed overseas, and those managed by Knight's team, are a small portion of the firm's total. Further, Ameriprise's subadvised wrap accounts represent a growing portion of Columbia Threadneedle's parent's assets, but it's essential that resources continue to flow to in-house management teams.
Price Pillar: Neutral | Tom Nations 02/06/2019
The strategy's average expenses warrant a Neutral Price rating.
The asset-weighted average Morningstar Fee Level ranking across the strategy's mutual fund share classes is in the middle of similarly distributed large-cap peers.
There is dispersion among share classes. With over 40% of the mutual fund's assets, the institutional vehicle is the largest of strategy's eight share classes. Its 0.77% expense ratio is 4 basis points higher than the median fee for institutionally priced large-cap peers and falls in the fourth quintile. The remaining seven share classes have fee levels that are Average or Below Average relative to their peers'. Recent expense reductions have been in line with category peers.
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Tom Nations, CFP® does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.