Jason Stipp: I am Jason Stipp for Morningstar.
As the market has been buffeted up and down by European and economic hopes and concerns, many investors are increasingly worried about the downside.
One manager who has a keen aptitude for managing downside risk is Tom Forester of Forester Value. He is here with me today to talk about the current economic situation and also how he is positioning his portfolio.
Thanks for joining me, Tom.
Tom Forester: Thanks, Jason.
Stipp: So, I would like to talk about the third quarter. I read your third-quarter letter for the fund. It's a large-value fund. For the trailing three months, it was in the top 3% of all large-value funds. So, good performance. It outperformed the S&P by about 3.5 percentage points. During this time, summer was a very volatile time, we had losses in the third quarter. Why did your fund hold up so well in that environment?
Forester: Well, a lot of the things that we've been concerned about, the banks in general, banks over in Europe, softening economic scenario, are starting to be borne out in reality right now, and people are starting to notice that. I think there was a shift away from high-beta names and into quality, and we have been positioned in high-quality names now for most of this year and even last year for a bit.
So, the market's coming our way, and we made some shifts to go even more that direction. So, we're a fund that likes to really hold up well on downside, try to limit downside risk, get most of the upside, and that's really kind of borne out in the third quarter.
Stipp: So, high-quality names, what are some of the top positions in your portfolio right now?
Forester: We've got Exxon, big high-quality name, Chevron, Microsoft (fortress balance sheet). On the financial side, we have got Travelers, which is one of the more conservative insurance companies out there. So, big-cap names, great balance sheets. These are the kind of guys where, even in '08, they could still get financing, where most companies were shut out of the market.
Stipp: You mention '08, I want to talk to you a little bit about '08 compared with today's environment. So in 2008, your fund actually made money. So, you did an excellent job of managing that intense downside risk.
This year, you've also been pretty glum about the environment for a while, even near the beginning of the year. We have been reading manager letters from you that had a pretty pessimistic tone. So, as you're looking at the environment today compared to 2008, what's the severity of your pessimism? Are you worried about another scenario where we have those kind of 2008 losses?
Forester: You know, we like to look at it as being realists, of course, but we think that the fruit is being borne out. What we have expected is starting to happen. We didn't think that QE2 was going to have much of an impact on fundamentals, and indeed that's kind of what happened, even though the market really liked it at first. And now, it's all come off. So, that's been kind of a nothing.
So, we've been concerned this year, QE2 didn't have an effect, but also when you look at the government, you know with high deficits, you don't have much room for fiscal policy. So, we think that that spigot is largely shut off at this point.
And if you look at the Fed, interest rates are at zero already. So, they don't have room on the interest rate front, and so, now they're trying to get creative with QE2, QE3, twist, shout--I don't know what else they'll have. I don't know. These are creative guys. Maybe they'll come up with something that works. But most of the bullets are pretty well used at this point.
So, we see difficulty right now, and we're somebody who isn't afraid to have some protection on when we see difficult markets and when we feel that there's more risk than there is return. So, while we're very optimistic about the future, down the road, we want to get through these patches where there's a lot of risk.