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Fund Times

Finding Bargains in a Downturn

Three money managers share their favorite stocks, what they’ve purchased and sold recently, and what role macroeconomic issues play in their investment decisions.

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This analyst blog is part of our coverage of the 2016 Morningstar Investment Conference. 

At the Morningstar Investment Conference on Tuesday, Morningstar's Russ Kinnel sat down with three diverse managers--Thyra Zerhusen from Fairpointe Capital, Vincent Montemaggiore from Fidelity, and Charles de Vaulx from International Value Advisors--to discuss their investing today.

Kinnel asked each panelist to discuss a single stock each manager has owned for a long time and why. Zerhusen, who takes a fundamentals-based approach to finding mid-cap stocks with solid business models, good long-term growth potential, and reasonable valuations, spotlighted  Mattel (MAT). She held the stock for more than a decade in Silver-rated  ASTON/Fairpointe Mid Cap (CHTTX), and sold when shares topped $40: Though she still liked the stock, she thought it was overpriced by all metrics at the time of sale. As the stock tumbled back into the $30 range--and lower--Zerhusen became a buyer.

De Vaulx notes that  Berkshire Hathaway (BRK.A) (BRK.B) was one of first stocks he bought when launched Silver-rated  IVA Worldwide (IVWAX) in 2008. Since purchasing, Berkshire has generated marketlike returns with less volatility--which is emblematic of the fund's strategy. In fact, the fund is notably careful: de Vaulx won't buy anything unless he's convinced the price is cheap enough to provide substantial upside with limited possibility of serious losses. To wit: The fund held nearly 40% of assets in cash at the end of 2016's first quarter.

Montemaggiore points to conglomerate Fresenius, which Bronze-rated  Fidelity Overseas (FOSFX) has owned since 2012. The European healthcare firm’s injectables business is what he calls “a gem” in the mix of this conglomerate.  Injectables are difficult to manufacture, notes Montemaggiore; as a result, the business has high barriers to entry. Moreover, he thinks management is adept at allocating capital. As a result, the stock is a core holding in the portfolio. That's fitting, given Montemaggiore's emphasis a company's cash flows, valuations, and business models.

The panelists turned to what they've been buying and selling this year. De Vaulx noted that the quality names he favors didn't fall very far in the first-quarter market malaise, so his buying was minimal. He did add to  United Technologies (UTX) and  Emerson Electric (EMR). Though intrigued by energy and mining, de Vaulx was "appalled" by their balance sheets. He nevertheless bought a few corporate bonds in the energy space, including paper from Joy Global. De Vaulx sold  Occidental Petroleum (OXY) during the rebound in energy and trimmed some of the portfolio's other energy names.

Zerhusen added Whirlpool (WHR) to the portfolio this year. She noted that the company has been on her watch list for a couple of years, and fell into buying range in January. Zerhusen expects the company to benefit from increased consumer spending; it didn’t hurt that competitor  General Electric (GE) was selling its appliance unit to Haier, either.

Montemaggiore, meanwhile, added Axel Springer (AXELF). He describes the publisher as a "legacy newspaper company that has good digital assets and classified assets." The company generates heady free cash flows and boasts a strong balance sheet, but the market is undervaluing its classified assets, Montemaggiore says. On the flip side, he sold longtime holding  Accenture (ACN). While he calls Accenture a "fantastic company" that's well-positioned against its competitors, it just became too pricey. Montemaggiore notes, however, that if the stock sells off, he might become a buyer.

Kinnel ended the session by asking the panelists what role macroeconomic issues--such as the U.S. presidential election or Brexit--play in their investment decisions. Zerhusen noted that while she and her team are obviously aware of macroeconomic issues, she doesn't let them overly influence her bottom-up approach. De Vaulx doesn't get wrapped up in macroeconomic issues either, noting, "Only God knows the future and he ain't telling us." He did say, however, that he pays close attention to credit trends in particular, because excesses in credit "never end well." Lastly, Montemaggiore said he’ll use the volatility that macroeconomic events can trigger to buy companies he has wanted to own but couldn't because of their valuations. He also reviews how the portfolio looks in aggregate to make sure he's not taking inadvertent macro bets. He brought down the portfolio's exposure to the U.K. due to Brexit, for instance; he says that his current exposure is manageable. "I want stocks to drive the fund," he says. 

Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.