(PUB) Investing 2016

15

July 2016

Morningstar FundInvestor

trying not to dwell on how much it’s down. So, I will once again evoke the words of Jack Bogle: “Don’t just do something, sit there!” We have a very long road ahead of us. It’s not clear when, how, or even if Brexit will occur. In addition, Scotland, Northern Ireland, and Wales are talking about leaving the United Kingdom to stay in the EU . And we don’t know who will be leading the U.K. effort to leave the EU . So, yes, there is uncertainty, and bad things are happening. But making a quick emotional trade is almost always the worst course of action. Sticking to your plan is almost always the best one. The fund world is abuzz over T. Rowe Price’s decision to reimburse shareholders for a colossal error in voting proxies related to a Dell buyout. It’s pretty complicated, but the short version is that T. Rowe Price miscommunicated with the firm voting its proxies, and the firm voted for a Dell buyout that T. Rowe Price opposed. Later, shareholders of Dell won a lawsuit over the price of the buyout and were entitled to extra compensation from Dell. However, the court excluded T. Rowe Price share- holders from the payout because the firm had voted for the merger. As a result, T. Rowe Price paid that money to the funds out of its own pocket. It cost the firm $194 million, and the money went in on June 3 . The biggest beneficiaries were shareholders of T. Rowe Price Science & Technology PRSCX , which received 1 . 2% of net asset value. I view the episode as good news and bad news for T. Rowe Price fund investors. The bad news is that the firm didn’t have a better system in place for managing proxy voting. The good news is that it shows that T. Rowe Price is standing up to do what’s right for shareholders. Other fund companies might have let it slide—though they would have been sued pretty quickly. T. Rowe Price to Reimburse Shareholders for Blunder

Managers Share Longtime Favorites At the Morningstar Investment Conference in June, I sat down with three diverse fund managers—Thyra Zerhusen from Fairpointe Capital, Vincent Montemag- giore from Fidelity, and Charles de Vaulx from Interna- tional Value Advisers—to discuss their investing. I asked each panelist to discuss a single stock that each has owned for a long time and why. Zerhusen, who takes a fundamentals-based approach to finding mid-cap stocks with solid business models, good long-term growth potential, and reasonable valuations, spotlighted Mattel MAT . She held the stock for more than a decade in Silver-rated Aston/ Fairpointe Mid Cap CHTTX and sold when shares topped $40 . Though she still liked the stock, she thought it was overpriced by all metrics at the time of sale. As the stock tumbled back into the $30 range—and lower—Zerhusen became a buyer. De Vaulx noted that Berkshire Hathaway BRK . A was one of the first stocks he bought when he launched Silver-rated IVA Worldwide IVWAX in 2008 . Since purchasing it, Berkshire Hathaway has generated marketlike returns with less volatility—which is emble- matic of the fund’s strategy. In fact, the fund is notably careful: De Vaulx won’t buy anything unless he’s convinced the price is cheap enough to provide substantial upside with limited possibility of serious losses. To wit, the fund held nearly 40% of assets in cash at the end of 2016 ’s first quarter. Montemaggiore pointed to Fresenius , which Bronze- rated Fidelity Overseas FOSFX has owned since 2012 . The European healthcare firm’s injectables busi- ness is what he calls “a gem” in the mix of this conglomerate. Injectables are difficult to manufacture, notes Montemaggiore; as a result, the business has high barriers to entry. Moreover, he thinks management is adept at allocating capital. As a result, the stock is a core holding in the portfolio. That’s fitting, given Montemaggiore’s emphasis on a compa- ny’s cash flows, valuations, and business models. K