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Uncovering Picks and Pitfalls with a Dual Approach

Ryan Leggio

Ryan Leggio: Hi, my name is Ryan Leggio. I'm a mutual fund analyst here at Morningstar. With me today is Mani Govil, manager of Oppenheimer Main Street. Mani was one of the most successful managers in 2008, when he managed RS Large Cap Alpha. Mani, thanks for joining us today.

Mani Govil: Thanks for having me, Ryan.

Leggio: Mani, I thought I'd ask initially can you talk about your investment process a little bit? I know you use both a qualitative and quantitative process.

Govil: Yeah, Ryan, we basically combine fundamental analysis and quantitative analysis. So on the fundamental side basically we meet with the company, its competitors, suppliers, customers. Basically what is known as Porter's analysis. And try to think through how this company, how its competitors and others, are going to change over the next three to five years, and how much of that is discounted into the stock price. That's the fundamental analysis.

The quantitative analysis is basically looking at all the companies on a quantitative basis, unemotional basis, and basically ranking all these companies. So whenever you have a company that looks very attractive on a fundamental basis and on a quantitative basis, that tends to go into the portfolio.

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Leggio: Sure. And so what happens, for instance, since you use both processes, when the two come to different opinions? From one standpoint it looks very cheap, and from another standpoint it looks really expensive. How do the two processes intertwine?

Govil: Basically when you have a difference of opinion, you try to reconcile and you try to understand why there are differences. I'll give you an example.

A couple of years ago in our quantitative process, AIG ranked very high. It was one of the top most companies in the quantitative process. Guess what? Our fundamental process was telling us something different.

We met with the company, we met with their competitors, and their competitors were telling us that the pricing environment was deteriorating, and they were gaining traction against AIG.

We met with AIG, and the feel that we got was that AIG was hoping that the competitor environment would take some of the weaker players away. From our point of view, hope is not a strategy. There was also quite some turnover in the management of AIG.

So on a fundamental basis, there were things that we did not like, although on a quantitative basis, things were looking really attractive. And hence we did not invest in the company, or actually divested, more importantly at that time.