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By Russel Kinnel and Christine Benz | 08-19-2015 04:00 PM

3 Contrarian Picks for Fund Investors

Delafield, Lateef, and Mairs & Power Growth have all suffered recently due to their heavy stakes in beaten-down sectors, but they could spell opportunity for patient investors, says Morningstar's Russ Kinnel.

Christine Benz: Hi, I'm Christine Benz for Funds with heavy weightings in industrials and especially energy stocks have suffered of late. But contrarian investors might reasonably give them a look. Joining me to discuss this topic is Morningstar FundInvestor editor Russ Kinnel.

Russ, thank you for being here.

Russ Kinnel: Good to be here.

Benz: Russ, in the September issue of FundInvestor, you've got a piece where you look at these funds that do have heavy weightings in industrials stocks as well as energy stocks. You talk about how their performance has not looked so great recently. But you think that, in many cases, these funds have solid management teams and, in fact, could be a little bit of a contrarian play for investors who are looking to pick their spots in what might be a pretty fairly valued market right now. Let's discuss what's been going on with these areas. I think casual observers have probably been paying attention to energy prices and the knock-on effects for energy stocks. But let's discuss that industrials space.

Kinnel: Well, I was intrigued partly because Warren Buffett made the huge purchase of Precision Castparts (PCP), which is in the industrials space. Like some industrials, it's got some of its business from aerospace, which is doing well, and some from energy, which is doing terribly. Part of his thesis is that even if energy just comes back a little, these stocks are priced pretty cheaply. I think there are a number of industrials companies that fit that bill--though, of course, there are a lot of different industrials that serve different industries that have different effects related to energy and the business cycle in general.

Benz: You highlighted a few funds that have struggled a bit recently because of these weightings. One is Delafield Fund (DEFIX). Its five-year returns do look terrible. But let's talk about the case for this fund. I know it's been kind of a longtime Morningstar analyst favorite. We've been recommending it for quite a long time.

Kinnel: That's right. This one is definitely in contrarian territory because the five-year results are not good. But they are trying to buy beat-up companies where something has gone wrong and they may need to restructure or sell off some assets or something. So, that's their game. And, of course, occasionally you get that wrong. Recently, that's led them into energy--and, of course, buying less-than-great energy companies has not been a great strategy. But if you look at their long-term record, it's been very good. So, this is really a fund that, if energy comes back, ought to do pretty well.

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