Seeking Value Among Large-Cap Medalists

Even though they’ve pulled back recently, U.S. large-cap stocks may not seem like fertile grounds for bargain-hunters after three straight years of double-digit gains. In fact, Morningstar’s analysis confirms the suspicion that values are scarce for large-cap fund investors.

Morningstar's stock analysts have developed a measure of fair value, using a proprietary discounted cash flow model to assess the more than 1,200 mostly large-cap names they cover. A stock with a price/fair value ratio greater than 1.0 is considered overvalued. By the end of 2013's speculative rally, the median stock had a price/fair value ratio of 1.06. It remained overvalued through much of 2014, though it dipped down to 1.0 by December. As of April 1, it was back up to 1.02.

Our fair value data recently showed that large-cap value stocks were the likeliest place to find good values. But that does not mean that diversified large-value portfolios are likely to be undervalued. We calculated overall price/fair value ratios for our large-cap Morningstar Medalists. (To ensure relevant results, we limited the search to those for which we had a recent portfolio and fair value figures for at least 75% of the portfolio.) As might be expected, the funds with highest ratios were generally growth funds, while value funds tended to have the lowest ratios. However, both growth and value funds were in general fully, if not richly, valued.

When we first took a look at funds’ price/fair value ratios in early 2013, not one of the large-value funds on our list had a ratio has high as 1.0. Today, only half are priced below our calculation of fair value, and not by much. This is partly because investors have piled into high-dividend-paying stocks in a low interest-rate environment. As a result, large-cap utilities and consumer staples names are generally overvalued by our stock analysts’ measure. So, for that matter, is every other broad sector except basic materials, energy, and financials.

Back in early 2013, a number of the large-cap value funds we looked at had price/fair value ratios under 0.90. But none of our large-cap Medalists, value or otherwise, did this time around. However, several of them had price/fair value ratios of 0.94 or 0.95. The common thread? These strategies are notably distinct, and the funds do not look much like the market overall. Three have concentrated portfolios, and even the more diversified

RiverPark/Wedgewood

RWGFX

Morningstar Category: Large Growth

Morningstar Analyst Rating: Silver

Price/Fair Value = 0.94

The only fund with a ratio under 0.95, this quirky growth fund trailed its rallying peers in the past two years. The portfolio’s above-average energy stake--consisting of big stakes in just a few stocks--helps explain its relatively low price/fair value ratio. While it also has significant exposure to more-traditional growth sectors such as technology and health care, it has no biotechnology. Lead manager David Rolfe and his team generally hold around only 20 stocks, and their search for growth has a contrarian streak. (They currently hold around 7% in cash.) However, they invest with care, and the fund’s turnover is well below average for a growth fund. While the fund hasn’t hit the five-year mark yet, Rolfe has produced strong risk-adjusted results at a similar separate account for more than 20 years.

AMG Yacktman Focused

YAFFX

Morningstar Category: Large Blend

Morningstar Analyst Rating: Silver

Price/Fair Value = 0.95

This concentrated portfolio of 28 stocks is also focused on high-quality consumer names, but price and valuation come first. Managers Don Yacktman, Steve Yacktman, and Jason Subotky have marshaled the fund’s defenses as valuations have risen. They’ve held on to cash and have added to recession-resistant staples such as

Invesco Comstock

ACSTX

Morningstar Category: Large Value

Morningstar Analyst Rating: Silver

Price/Fair Value = 0.95

Lead manager Kevin Holt and team go against the grain. They prefer companies that are cheap on a variety of valuation measures, and they generally aren't willing to pay up for higher-quality ones. Unlike many of its large-value peers, the fund rarely strays into the blend portion of the Morningstar Style Box. They added to the fund’s energy names last year; the sector is now one of its largest stakes. While diversification across 70-80 names has moderated risk to an extent, the fund’s sometimes-contrarian stance has led to periods of underperformance. Its overall performance since Holt joined the team in 1999 is strong, though.

Oakmark Select

OAKLX

Morningstar Category: Large Blend

Morningstar Analyst Rating: Gold

Price/Fair Value = 0.95

Manager Bill Nygren has been leery of the valuations of higher-yielding stocks for several years now. Like his Oakmark colleagues, Nygren invests in firms whose share prices reflect steep discounts to their estimates of the businesses' worth. He looks for absolute value, not relative, and will take decisive sector stances. The 20-stock portfolio tilts decidedly toward financials today, including 4-star top holding