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To Find Values, Avoid Big Yields The Contrarian | Russel Kinnel

bit more tech stocks than most conservative-alloca- tion funds. On the bond side, it favors corporate bonds and mortgages over Treasuries. Like many other funds from Manning & Napier, this one has strong long-term returns. Oakmark Select OAKLX has almost no yield after expenses as Bill Nygren has found a number of divi- dendless bargains. TRW Automotive TRW , DirecTV DTV , and American International Group AIG , none of which pay dividends, are in the fund’s top 10 . Nygren is sometimes early, but he’s generally pretty adept at finding good companies. Wally Weitz’s Weitz Partners Value WPVLX , likewise, has virtually no yield. While others are all over yield plays from Big Oil, banks, and telecom, Weitz has big investments in Berkshire Hathaway BRK .A, Valeant Pharma- ceuticals VRX , Direc TV , and Google GOOG . Weitz takes a flexible, somewhat contrarian approach to find good companies trading at a sizable discount to his estimate of their value. It makes for a bumpy but rewarding ride. Artisan Value ARTLX has one of the lowest-yielding portfolios in the large-value category. The portfolio yield is just 1 . 73% , or 0 . 65% after fees. Scott Satter- white has been scooping up stocks with relatively low yields, such as National Oilwell Varco NOV , Apache APA , and Oracle ORCL . Satterwhite looks for companies with clean balance sheets, but his bias toward tech and some other faster-growing areas leads him into lower-yielding names than his peers prefer. His success at other funds over the long haul leads us to have faith in this fund despite its shorter track record. Royce Opportunity RYPNX has been a keeper under Buzz Zaino and William Hench, but it’s not yield that will keep you around—this fund doesn’t have any. In this case it’s not because they like growth names but because they go so deep into value. They buy turn- arounds and asset plays where companies are often holding on to their cash in order to get through a rough patch. The stocks are well off the beaten path, and that’s worked out nicely. œ

At the Morningstar Investment Conference, JPM organ manager Anne Lester put it succinctly: “Everyone is on the same side of the income trade and that’s made income very expensive.” If you want to find attractive investments today, run in the opposite direction from all those yield-chasers. Investments with little or no yield may well be cheaper than those with high yields. The obvious place to start is with growth stocks. United States growth funds like Harbor Capital Appreciation HACAX , Akre Focus AKREX , and Westport WPFRX fit the bill, as do foreign growth funds such as T. Rowe Price International Discovery PRIDX and Vanguard International Growth VWIGX . But within categories more known for their yields, there may also be some opportunities in moving to lower-yielding portfolios. Not only are they likely to be cheaper, but they may be less risky because they haven’t been bid up as much. As I’m trying to avoid the most overbought securities, I want to see the port- folio yield. Expenses are subtracted from yield, so you need to add back expenses to see a portfolio’s yield. After all, if two funds have identical securi- ties, having a higher expense ratio won’t make it less risky. Yield-chasers have been all over real estate investment trusts, but much less so real estate oper- ating companies. Third Avenue International Real Estate Value TAREX invests in mostly foreign real estate operating companies. Its 4 . 23% ( 3 . 14% after fees) portfolio yield is actually pretty low for the global real estate category, so it may prove to have better risk-adjusted returns over the next five to 10 years. Manning & Napier Pro-Blend Moderate Term EXBAX has a modest 2 . 1% portfolio yield ( 0 . 99% ) after taxes. The equity side straddles the growth and blend line of the Morningstar Style Box with quite a

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.