Our Four Favorite Alternatives to Clipper Fund

In recent weeks, there has been much talk about exactly what shareholders of the high-profile  Clipper Fund (CFIMX) should do now that some prominent managers are departing. An easy solution for now is to stay put. After all, the fund will be run by the departing team at least until the end of the year, so there's no harm in waiting around to see who'll be calling the shots beginning in 2006. (While there have been significant outflows, the fund's cash level should be able to meet them for now.)

The odds currently favor Texas-based Barrow, Hanley, Mewhinney & Strauss (BHMS), a unit of Old Mutual, which also owns the current advisor to Clipper. As we've pointed out before, though, given the depth of talent in the value space, we think Clipper shareholders should at a minimum assess the entire landscape. And for those who are inclined to shift their assets, we're offering up a couple of suggestions. One caveat, of course, is that given Clipper's uniqueness, the other funds aren't perfect substitutes for it.

 Vanguard Windsor II (VWNFX)
If BHMS runs Clipper Fund, we think that it's likely that Clipper will evolve over time to look like the portion of this fund run by BHMS. Given this fund's lower costs, it compares favorably with what is likely to be the new Clipper, even though BHMS is just one of five managers on the fund (controlling approximately 70% of its assets). However, that allocation is divided among a little more than 40 stocks, so the core of this fund is indeed managed in a very concentrated fashion. Investors will want to note that some of this fund's recent performance comes from energy stocks, which may be due to cool off. With few exceptions, those stocks have generally been avoided by Clipper.

 Oakmark Select (OAKLX)
Not only is it as concentrated as Clipper, but this fund also has a disciplined value approach. Moreover, with an increased preference for large caps, this fund is beginning to look like a good trade for Clipper shareholders, who've largely owned a big-cap portfolio. The key difference between the two funds may be that while Clipper has always been run in an absolute value style, manager Bill Nygren sometimes takes his cues from how a stock's valuation compares with its peers' or the market's in general. He's also shown himself to be more wary of litigation risk than the folks at Clipper ever were.

 Weitz Partners Value (WPVLX)
A value discipline and willingness to hold cash mean that this fund has more than a few things in common with Clipper. In fact it, too, has been on the outs lately because manager Wally Weitz has been as guarded about the market as the Clipper managers. He also shares with them a healthy skepticism for the tech sector, where it's tougher to predict the consistency and stability of cash flows. However, Weitz buys stocks of all shapes and sizes, so this portfolio is different from Clipper's in that it doesn't only own large caps. Weitz has also shown a much greater predilection for owning media and telecommunication stocks over the years than has the Clipper team.

 Oak Value 
Management here looks for companies with easily understandable business models, sustainable cash flows, and strong management teams. But it won't buy such a company unless it's selling at a discount to the team's estimate of its intrinsic value. Insurance, media, and consumer-products stocks have traditionally been the managers' favorites, although they will look elsewhere. However, this fund is different from Clipper in that it doesn't embrace with same ferocity firms in temporary turmoil that Clipper did.