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A Fund You'll Be Hearing More About

Despite its volatility, investors have enjoyed most of this intriguing fund's outperformance.

Shannon Zimmerman, 09/12/2011

MassMutual Select Focused Value MFVSX doesn't have an enormous asset base. It isn't led by a household-name manager, and it's not widely available, either. Despite those apparent disadvantages, it's an intriguing fund nonetheless, one that we'll soon provide analyst coverage for and that lends itself to an illustration of Morningstar's analytical pillars: performance, parent, people, process, and price.

Performance: Rocky but Rewarding
Through Sept. 8, 2011, Select Focused Value ranks in the large-blend category's top decile in all trailing periods of three years or more. (Its one-year return lands in the peer group's 12th percentile.) Based on the fund's similarly strong dollar-weighted returns, which account for money flows into and out its coffers, investors have enjoyed most of its outperformance, too.

That's an indication that shareholders have found the fund easy to use, which isn't always the case with successful funds, particularly those that have been as volatile and vulnerable to market declines as this one.

Historically, performance swings at this concentrated offering--the current lineup includes just 22 names--have been significantly wider than the large-blend norm and those of the S&P 500. What's more, the fund's impressive returns don't owe to effective defense but to strong showings amid rising equity prices. In the trailing 10-year period through Aug. 31, the fund captured 134% of the S&P 500's increases and nearly 114% of its losses.

That said, the fund's limited availability has likely helped investors stay the course. Shareholders have access to the fund primarily through retirement plans, whose assets are generally stickier. That allows management to remain focused on long-term results, which this fund has delivered in spades, rather than worrying about near-term returns or meeting the redemptions of impatient investors.

Parent and People: High Quality With an Asterisk
It comes with a caveat (more about that below), but the caliber of the fund's management is another positive attribute. Subadvised by Oakmark parent Harris Associates, the fund is led on a day-to-day basis by Harris' chairman and CIO Bob Levy, who boasts 35 years of investment experience, 26 of them at Harris. (Michael Mangan, a comanager here, plays a backup role.)

Harris boasts an admirable investing-centric culture. New product launches aren't driven by market trends, for example, but by experienced money managers with decades of experience and outstanding long-term track records. Indeed, Oakmark has launched just one new fund (Oakmark Global Select OAKWX, a concentrated world-stock offering) in the last 12 years. That one came about because a pair of the shop's managers--Bill Nygren and David Herro--wanted to work more closely together on a fund that aligned with the way they prefer to invest their own money.

The firm's roughly 15 investment analysts are divided into international and domestic teams, with the latter supporting Levy on this fund. Like nearly all the managers of Oakmark branded offerings, Levy invests more than $1 million in his charge, which hews to the same valuation-sensitive strategy that powers his colleagues' portfolios.

Process: Proven, but Patience Is Required
In building the fund's portfolio, Levy works from the list of approved stocks that Harris uses on a shopwide basis. He invests in only those names he finds most attractively valued in absolute, not relative, terms. In other words, he won't buy shares of a company he considers pricey just because its industry rivals trade with even richer multiples. Such stocks can still be grossly overvalued, as the late 1990s tech and the more recent real estate bubbles painfully illustrated.

More fundamentally, companies can also be expensive relative to what Harris calls their "true business value." Aiming to avoid such value traps, Levy invests exclusively in firms whose share prices reflect steep discounts to his estimate of the businesses' worth, arriving at that figure through a process that's part art, part science.

Among other techniques, he uses multiple, company-specific valuation methods to arrive at a company's worth. For capital-intensive firms, for example, tangible book value can be a key metric, with Levy weighing the worth of the company's hard assets. Private market acquisition price estimates also inform the process, with recent takeout activity in a company's industry among the key considerations.  

Discounted cash flow analysis is in play here as well, with Levy sensibly placing little emphasis on long-range earnings forecasts and normalizing cash flow figures for firms whose cash flows can be lumpy. That's the case with many companies within the energy sector, for example, an area of the market that recently soaked up more than 20% of the fund's assets. That allocation more than doubles the highest level of exposure at any Oakmark fund.

Questions for Further Research
Though the fund strikes an impressive risk/reward profile, it has shortcomings, and there are issues that require more scrutiny.

Foremost among them is that, while Levy has helmed the fund since its April 2000 inception, he hasn't been its only manager, nor has Harris been its only subadvisor. Levy's colleague Bill Nygren served as a comanager from May 2000 through March 2006. And between June 2004 and March 2008, MassMutual enlisted a second subadvisor, Cooke & Bieler, amid concerns about capacity constraints given Harris' concentrated tack.

That temporary addition of a second subadvisor underscores MassMutual's role as this fund's ultimate parent, highlighting the need to learn more about the firm's approach to vetting managers. Whether MassMutual would ever opt to close the fund rather than bring in additional stock-pickers is another important question.      

Costs are also a concern. While the bulk of the fund's assets reside in its attractively priced S shares, the more expensive A shares also hold a substantial portion of its $570 million base. Priced at 1.30%, the A shares' expense ratio ticks above the broad large-blend norm. It's higher than the typical large-cap front-load fund's price tag, too.

Finally, the ways in which this offering differs from Oakmark's lineup warrant additional scrutiny. The portfolio's energy exposure is one key difference. And although its concentration is similar to that of Nygren's Oakmark Select OAKLX, the two portfolios are hardly clones. In fact, while media concern Discovery Communications DISCK remains Select's top pick, Levy recently eliminated the company from this fund's portfolio.  

During a recent interview, Levy accounted for that primarily by pointing to the funds' varying degrees of emphasis on tax efficiency--a lesser concern here given the tax-favored accounts in which the fund is mainly held. Still, as an illustration of the way two talented stock-pickers can come to different conclusions while working from the same playbook, it's a striking divergence that requires more research.

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