How This Bronze-Rated Fund Avoids Value Traps

Russ Kinnel: Hi, I'm Russ Kinnel with Morningstar. Today, I'm joined by Marian Kessler, who is a comanager of Becker Value, a Bronze-rated 4-star fund. Thanks for joining us.

Marian Kessler: It's my pleasure. Thank you.

Kinnel: So, why don't we start with just a basic intro. If you can give us a little idea of what your fund strategy is?

Kessler: Sure. Our fund has been around for 11 or 12 years. It's a 4-star Morningstar-rated fund and we're a value fund, but we focus on quality companies within the value space.

Kinnel: And I think your sell discipline is an interesting one. Can you tell us a little bit about how that works?

Kessler: Yes. Our sell discipline is really in place to manage the risk in the portfolio because we are long-term investors focused on compounding returns for our fundholders over a long period of time, and we have a sell discipline of every stock if it is down 15% from its cost, it's reviewed by the team; if it's down 25%, barring existing market issues and challenges, the stock is automatically sold. We want to take the ego and the bias out of the process.

Kinnel: And of course, that's really crucial for a value investor because every once in a while you get a value trap.

Kessler: Yes, and they come more often than you would like as a value manager. But managing to avoid the value traps, for example, financial stocks in the 2007-08 period, very good place to just be out of that value trap market.

Kinnel: Sure. So, let's talk about where your portfolio is today. We've had a nice rebound after a severe sell-off to start the year. Where have you been finding values?

Kessler: Probably the most attractive area of values right now in the market is within financial stocks. They sold off hard, particularly in January, over concerns about the high-yield market, shale oil producers, energy, high-yield defaults. And less and less of the risk is held now at traditional banks and investment banks than it is in hedge funds or alternatives. So, I think the risks are much lower and there was a real break between the fundamentals of many of the financial companies and investor sentiment, which turned very negative.

Kinnel: It seems like a lot of the concern was with European banks, but then that came over to American banks, which aren't necessarily in the same situation that European banks are.

Kessler: Exactly. Again, that disconnect is what we're looking for. We're looking for the stock that's been beaten up by the market where the fundamentals don't justify that action.

Kinnel: Can you tell us about JPMorgan Chase, which I believe is one of your top holdings?

Kessler: One of our largest holdings. It's a little over 3% position in the fund. We actually bought that stock in January of 2009 once we could really make a case for an attractive valuation, selling at a discount to its intrinsic value, but we could see a stable to improving roadmap to the future.

Kinnel: And I'm curious about Pfizer. It's been declining lately with the rest of the healthcare sector. But it's a huge company. Are there advantages to being a company with that kind of heft?

Kessler: I think so. It has a very good balance sheet. It has a good product pipeline. I think the Allergan acquisition is going to be a real positive. It will add more growth into that pipeline. So, Pfizer in the meantime has a good yield. Unfortunately, ETFs and ETF trading drives a great deal of individual stock performance and the healthcare ETFs have been under a lot of pressure with Valeant and others in that space, and they have tagged a number of the companies that are really immune from that, Pfizer being one of them.

Kinnel: So, the sell-off in Pfizer hasn't really weakened your conviction at all?

Kessler: Not at all. In fact, it's given us more. We've added to that name this year.

Kinnel: I'm curious about Exxon Mobil. What led you into that name?

Kessler: We were looking for more ballast in the energy space midyear last year. We've sold some of our more high-beta names in the energy space at the beginning of last year and added a little bit more conservative exposure; still underweight slightly financial stocks relative to our bench, the Russell 1000 Value. But Exxon, very strong balance sheet, committed to its dividend, will be a re-purchaser of its own stock. So, we continue to really like that name. And it has done very, very well, too, as a solid core holding within the fund.

Kinnel: Marian Kessler, thanks so much for taking out the time.

Kessler: I really appreciate it. Thank you.