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3 Contrarian Picks for Fund Investors

Russel Kinnel
Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Funds with heavy weightings in industrials and especially energy stocks have suffered of late. But contrarian investors might reasonably give them a look. Joining me to discuss this topic is Morningstar FundInvestor editor Russ Kinnel.

Russ, thank you for being here.

Russ Kinnel: Good to be here.

Benz: Russ, in the September issue of FundInvestor, you've got a piece where you look at these funds that do have heavy weightings in industrials stocks as well as energy stocks. You talk about how their performance has not looked so great recently. But you think that, in many cases, these funds have solid management teams and, in fact, could be a little bit of a contrarian play for investors who are looking to pick their spots in what might be a pretty fairly valued market right now. Let's discuss what's been going on with these areas. I think casual observers have probably been paying attention to energy prices and the knock-on effects for energy stocks. But let's discuss that industrials space.

Kinnel: Well, I was intrigued partly because Warren Buffett made the huge purchase of Precision Castparts (PCP), which is in the industrials space. Like some industrials, it's got some of its business from aerospace, which is doing well, and some from energy, which is doing terribly. Part of his thesis is that even if energy just comes back a little, these stocks are priced pretty cheaply. I think there are a number of industrials companies that fit that bill--though, of course, there are a lot of different industrials that serve different industries that have different effects related to energy and the business cycle in general.

Benz: You highlighted a few funds that have struggled a bit recently because of these weightings. One is Delafield Fund (DEFIX). Its five-year returns do look terrible. But let's talk about the case for this fund. I know it's been kind of a longtime Morningstar analyst favorite. We've been recommending it for quite a long time.

Kinnel: That's right. This one is definitely in contrarian territory because the five-year results are not good. But they are trying to buy beat-up companies where something has gone wrong and they may need to restructure or sell off some assets or something. So, that's their game. And, of course, occasionally you get that wrong. Recently, that's led them into energy--and, of course, buying less-than-great energy companies has not been a great strategy. But if you look at their long-term record, it's been very good. So, this is really a fund that, if energy comes back, ought to do pretty well.

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Benz: Another fund on your list [hasn't performed as badly]. It's a less-familiar name; it's called Lateef (LIMAX). Let's talk about the background on that fund and its particular attraction to some of these unloved names.

Kinnel: That's right. It's got a lot in energy and industrials--more on the industrials side, though. It's run by managers who used to work at Weitz and Oak Value. Those are both firms that were very influenced by Warren Buffett. So, fitting with that Buffett theme, I thought this made a lot of sense. They try to buy good companies at a discount, and you see a mix of value and growth names there. They are definitely more growthy than the Delafield choice. So, you've got Facebook (FB) and Google (GOOGL), but you also have names like Aon (AON) and some typical industrials companies. If you look at it from when it was launched in '07, the fund has actually beaten its benchmark and has a lot going for it. It also has a very small asset base, so the managers have a lot of flexibility.

Benz: The last fund that you wanted to talk about is a more familiar name to people who plug in to Morningstar.com--Mairs & Power Growth (MPGFX). Let's talk about its emphasis in some of these unloved areas and the long-term thesis for the fund.

Kinnel: It probably has a little more of a quality bent. That leads them into names like 3M (MMM) and those kinds of companies. So, it's not as much of a contrarian play as Delafield, but it's still a very solid firm based in Minnesota. Many Morningstar customers know they invest in a lot of companies near Minnesota like 3M. They have done a really good job; they have a very consistent strategy and a very stable team there. So, there is a lot to like. [What you see is what you get] in terms of how they buy those kinds of companies and hold on to them. It's a very low-turnover process.

Benz: So, some unloved [funds] could spell opportunity for investors who have the patience to hang on.

Kinnel: I think so.

Benz: Russ, thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com. 

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