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By Jason Stipp | 01-11-2012 01:00 PM

Why More Values in Large Caps?

Heartland Select Value manager Will Nasgovitz says skepticism about future growth or margin improvement may be weighing on larger, high-quality companies, making them more attractive for value investors.

Jason Stipp: I'm Jason Stipp for Morningstar. The Heartland Select Value Fund is a value-seeking investment that can look across the market-cap spectrum to find value.

We are checking in today with Will Nasgovitz, a manager on that fund, to learn where they have been finding value recently, and also get his thoughts on what's coming up ahead.

Thanks for joining me, Will.

Will Nasgovitz: Thanks for having me.

Stipp: So the first question for you: Heartland Select Value Fund falls into the mid-cap style box, but actually you folks invest across the market-cap spectrum. It's an all-cap fund. So I was wondering, according to your recent portfolio data, you have about 40% in large caps, 26% in mid-caps, and 33% in the smaller and the micro-caps. Can we interpret that as a signal that you're seeing more values in the bigger companies today?

Nasgovitz: That's a great question. As you mentioned, the Select Value Fund is a go-anywhere, best-ideas, best-values-in-the-marketplace fund, and we have found more value in large caps here most recently. It's been at the expense, Jason, more of the mid-cap area. You mentioned, [mid-caps are] about 26% of the portfolio. Mid-caps up until last year were a really, really strong area of the market; valuations, in our view, are perhaps a little stretched, so we have seen some more allocation up into large caps.

We still do have a healthy dose in small caps. If you peel back the onion a little bit and look at the Russell 2000, for instance. Some of the higher-quality companies within the Russell 2000 as measured by return on invested capital, are trading below higher-quality large-caps. So we still think there is value in small-caps as well.

Stipp: And I know that you are looking issue by issue, and you are doing that bottom-up analysis on the companies, but I would like to pick your brain a little about this trend in large-caps, because conventional wisdom would suggest that the bigger companies are more widely followed, the market is more efficient in pricing them, but you guys have seen it, other managers we've talked to have seen it, our own analysts have seen that large-caps actually like pretty good values, and high quality as well. Why is that? Why is it that in a market that's been so volatile recently, we're finding these what would normally be considered safer stocks trading at good valuations?

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