Will Media Stocks Keep These Funds on Top?

In this year's market rally, one of the most striking developments has been the resurgence of media stocks. Not long ago, most traditional media stocks were being dismissed as dinosaurs amid seismic changes that have decimated the newspaper industry and forced nearly all media firms to adapt to new economic realities. On top of that, the recession has depressed advertising spending, and last year's credit crunch took a toll on media firms with lots of debt on their balance sheets.

The improving economy has brightened the outlook considerably, helping these stocks bounce back with a vengeance. Of Morningstar's 12 stock sectors, media has the best average return for the year to date and the trailing three months as of Nov. 12. The average media stock is up more than 80% for the year, and prominent names such as  Sirius XM Radio (SIRI),  McClatchy , and  Liberty Interactive (LINTA) have more than tripled in price.

But is this rally sustainable, or will the problems that plagued these stocks before bring them back down to earth? Among those betting that media stocks are for real are a number of topnotch mutual funds with big weightings in the sector. These include some speciality funds such as  Fidelity Select Multimedia (FBMPX), which has more than 80% of its portfolio in the sector, and Rydex Leisure (RYLIX), which has nearly half its portfolio in media stocks. But there are also quite a few diversified funds with large media stakes.

The following table shows the 10 diversified domestic-stock funds with at least $100 million in assets that have the highest percentage of their assets in media stocks, as of their most recent portfolio. In addition to each fund's category and the size of its asset base, we also show its percentile ranking in its category for the year to date as of Nov. 12, and its percentile ranking in 2008, when media stocks were down in the dumps.

Diversified Domestic-Stock Funds with the Most Media Exposure

These are all value or blend funds, which is not too surprising given how out of favor media stocks were until recently. They have fairly concentrated portfolios, with only  Gabelli Value (GABVX) holding more than 56 stocks, and they tend to make big sector bets. What stands out about this group is the quality of the funds. Although there are only two Fund Analyst Picks here ( Oakmark (OAKMX) and  Oakmark Select (OAKLX)), these are all good funds run by managers who have proved to be strong stock-pickers over time. Several managers are represented more than once.

For example, Bill Nygren is lead manager of Oakmark and Oakmark Select and also manages one of the four sleeves of  Masters' Select Value . Nygren's contrarian strategy favors cheap stocks with strong free cash flows and has long led the Oakmark funds to have more media exposure than their peers. (David Herro's  Oakmark International (OAKIX) also holds a lot of media stocks.) During the bear market, Nygren added to that exposure because he thought many of these stocks were being unfairly punished, and that the content provided by firms such as Viacom --owner of MTV, VH1, and Comedy Central--will allow them to maintain their competitive advantages even as more people watch that content in new media, especially online. Discovery Communications  and  Liberty Entertainment  together take up nearly 18% of Oakmark Select, and Liberty Entertainment is the top holding of the less concentrated Oakmark fund.

Don Yacktman, who manages  Yacktman (YACKX) and Yacktman Focused (YAFFX) with his son Stephen, is another manager with a great long-term record who sees a lot of value in media stocks. Yacktman hasn't always been a huge media fan--the funds held almost no media stocks as recently as 2007--but the bear market led him to load up on the sector, for reasons similar to Nygren's.  News Corporation  (owner of the Fox networks and Dow Jones) and Viacom are among the Yacktman fund's top five holdings, and cable firm Comcast  and Liberty Interactive (owner of the QVC shopping network) are among the top 20.

John Rogers, founder of Ariel Capital Management and comanager of the  Ariel (ARGFX) and  Ariel Appreciation (CAAPX) funds, is a longtime fan of the media sector, like Nygren, but his exposure is somewhat different in its emphasis. Rogers has long believed that the market was underestimating the potential of newspapers, and  Gannett (GCI), publisher of USA Today and many other newspapers, is the top holding of both Ariel and Ariel Appreciation. Advertising giant  Interpublic Group (IPG) is also a top 10 holding in both funds, as is  CBS (CBS), the only TV/radio content provider held by Ariel. (Ariel Appreciation also has a small position in Viacom.)

The other managers represented on this list, including Mario Gabelli of Gabelli Value, Thyra Zerhusen of  Aston/Optimum Mid Cap (CHTTX), and Arthur Moretti of  Neuberger Berman Guardian (NGUAX), are also longtime media fans. Gabelli likes cable and broadcast TV firms like those preferred by Nygren and Yacktman, while Zerhusen, like Rogers, is a fan of newspaper firms such as  New York Times (NYT) and Gannett.

These media stocks have helped these funds this year. All 10 are beating their categories for the year to date, with eight ranking in the top decile. That's quite a contrast to 2008, when only half of these funds beat their categories. Although there are still plenty of good managers out there who have avoided media stocks, the fact that this group of proven managers sees so much value in the sector should provide comfort to anyone who also believes there's still some life left in traditional media firms.