Homestead Value

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The economic crisis hasn't shaken the foundation of Homestead Value Fund HOVLX.

Indeed, the fund's longtime managers have been calmly conducting business as usual. The fund had no exposure to large-cap value disaster American International Group AIG, for one. Nor did the managers scramble to raise cash or make ill-timed forays into names such as Lehman Brothers, which seemed like an attractive value in early 2008, then collapsed later in the year. Granted, given its value focus, the fund was almost inevitably caught with a few financials duds, which triggered a higher turnover rate than usual, according to Mark Ashton, one of the fund's three comanagers. Nonetheless, turnover was less than 10% in 2008, compared with a large-cap value category average of nearly 70%.

"Although we make sure to maintain an open curiosity [about new investments], sometimes it's best to let things just percolate along," says Ashton, who came to Homestead Funds from Capital Research and Management in 1999. Indeed, the team's picks sometimes require patience. The team's investment process is "the exact opposite of that used by relative-strength or trend followers," says Peter Morris, who has run the fund with Stuart Teach since its 1990 inception. "Often, when we buy a stock, its relative strength is negative." The managers move deliberately, generally building positions slowly and selling gradually.

The team also plays confidently. This is a concentrated portfolio, with 45 holdings as of the end of 2008, and almost no cash. The managers may seek out companies in trouble, but they require sound balance sheets, healthy cash flow, and demonstrated strength in particular areas of business--and reason to anticipate a turnaround, such as a change in leadership. That fosters the possibility that "others might recognize the value for us," Ashton says, and acquire the company. Former holdings Wendy's International and IKON Office Solutions were bought out in 2008.

Distinctive Holdings
The idiosyncratic portfolio has a hardware stake nearly three times the large-cap value average. Hewlett-Packard HPQ, Dell DELL, Intel INTC, and Cisco CSCO made up 12.5% of assets at year-end. Ashton says that Hewlett-Packard was emblematic of what the team seeks in a value opportunity: a company with a sustainable advantage that is beset by temporary problems. "Bad news is a good place to start because it usually begets lower valuations," he says, laughing. The managers initiated the position in HP earlier this decade, when the company's PC business was crushed by competitors Dell and IBM IBM. The company was kept afloat by its strong printer, server, and IT businesses, however, and new management turned things around.

Dell, Intel, and Cisco were added as value opportunities arose in 2006 and 2007. Intel, for example, was under pressure from competitor Advanced Micro Devices AMD, but it makes the dual- and quad-core chips that customers have come to take for granted in their computers and handheld devices.

Ashton expects that these are investments for the long haul, as an improving economy expands the market for the companies' ever-advancing technologies. "One thing I've learned here is that not being in a hurry can yield benefits," Ashton says. "A traditional value shop would have let Hewlett-Packard go earlier in the story, but there is more to come. The acquisition of [IT service provider] EDS opens lots of doors."