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Fund Manager Q&A

Finding Value in Dividend-Payers

Loomis Sayles' Warren Koontz on opportunity among dividend stocks, and the attractiveness of banks and large-cap tech companies today.

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Warren Koontz is the vice president of Loomis, Sayles, & Co. and the co-portfolio manager of the  Loomis Sayles Value Fund  (LSGIX). He is a specialist in large-cap value investing strategies. Koontz recently answered our questions on how good value ideas are found with high-dividend payers, the attractiveness of banks, and the fund's approach on foreign stocks.

1. A number of the fund's top holdings are high-dividend payers. Is that by design or simply a result of where you see the values today?
While we like dividend yields, it is not a primary driver of our strategy. It is, however, a reflection of where we are finding good value ideas. Many of our higher-yielding names have been stocks in a sector like health care that have lagged or been punished in the short term, thus creating very good entry points and long-term values. The larger yields may also be a reflection of companies with good cash flow, thus creating the ability to have higher dividend payouts.

2. It's clear you see value in big banks such as J.P. Morgan, Bank of America, Wells Fargo, and PNC. Can you speak to what's attracted you to them?
We believe many bank stocks are selling at attractive discounts to their normalized earnings. Although there are certainly headline worries from Washington, the decent yield-curve environment, coupled with the fact that most banks have paid back their TARP (Troubled Asset Relief Program) funds, should benefit their core businesses. We believe it is too early to make investment decisions on the Obama administration's bank fee proposal and limits to their other businesses.

3. It seems that many of the big banks still have a number of detractors. Is there anything about the bear case with these banks that you agree with, and if so, how does it factor into how you're valuing these firms?
There are pertinent points to the bear case for banks, but current valuations reflect their angst. Regardless, we believe banks are selling at attractive levels relative to their probable earnings potential.

4. During the past year, a number of your rivals have placed large chunks of their funds' assets in large-cap tech companies. While you have some exposure there, it's less than that of the broader market. Can you speak to why you've been somewhat restrained in that area?
While we have less exposure than the broader market and relative to our primary benchmark, the Russell 1000 Value Index, we are still quite a bit overweight in the sector. We have found many attractive tech names, particularly during the rough bear market of 2008, when we found several compelling ideas in the sector. Very strong balance sheets and good cash flows attracted us to historically low valuations. The stocks have been very good performers off the March 9, 2009, bottom, and we have taken some profits. But it still has a solid overweighting in our value portfolio.

5. Approximately 8% of the fund's portfolio is in foreign stocks. Do you see that rising over time? If so, how do you plan to make the necessary adjustments to your research resources and processes to successfully navigate through a wider selection of stocks?
We use American Depository Receipts (ADRs) in our portfolio; however, we limit them to a maximum of 10%. As we see it, our investment universe has gone global, and there are many very well-run companies that clearly meet our value criteria that happen to be headquartered outside the U.S. We do not find it difficult to analyze foreign stocks, as you cannot analyze domestic stocks thoroughly without comparing them with viable foreign competitors.

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