Looking For Values


As some of the major financial institutions on Wall Street post billion-dollar losses and even show their chief executives the door, the reality is that the subprime lending crisis is still at its earliest stages. The resulting uncertainty is fueling a stock market that seems increasingly prone to triple-digit swings in the Dow Jones industrial average.

Yet the market’s behavior isn’t keeping Tracy Brown awake at night. The investment adviser at William Tell Financial Services in Latham, New York, counsels her clients on an old value investing standby: buy and hold. That not only helps them avoid obsessing about every fluctuation in the market, it also generates solid returns. “Value investing–while using a long term strategy–is the best way to combat volatility,” she says.

Brown represents the contingent of investors lost in the din of the bull-market run over the past five years. So-called value investors are always on the lookout for a good buy, but their time horizons–generally three to five years–are much longer than those of their growth-investing counterparts. They look for companies that may look bad at first glance–thanks to management turmoil, an earnings shortfall, or market jitters–but on closer inspection show otherwise healthy companies that have been cast aside and forgotten. These companies generally trade below book value and have compelling growth horizons.

For her clients seeking mutual fund options, one of Brown’s favorites is Pioneer Equity Income (PEQIX). It’s a large-cap value fund that focuses on dividend paying stocks. It’s earned an average annual return of more than 13% for the past five years, almost a full percentage point better than the S&P 500.

In recent years, hot growth stocks have handily outpaced value stocks, but their valuations might give hints of a coming realignment, value investors say. “People are not getting paid for a lot of risk they are taking on,” says Tim Fidler, a portfolio manager at Ariel Capital Management (No. 2 on the be asset managers list with $16.1 billion in assets under management). Fidler notes that in bull runs, investors underestimate risks such as credit problems, inflation, and economic cyclicality.

What’s more, they also fear any sign of weakness, piling onto market darlings. “People are so afraid of underperforming these days,” says David Giroux, a portfolio manager of T. Rowe Price Capital Appreciation (PRWCX), a moderate allocation fund that invests in both stocks and bonds. “What we have here is a momentum-based market that is being led by things that have been very good stocks over the last five years.” Examples include companies such as Google (GOOG) and Apple Inc. (AAPL) as well as oil services companies. “But the valuation really doesn’t matter, and it is not justified in a lot of these names.”

To be sure, finding companies on the cheap is still not an easy task. But value investors’ ability to unearth a few stones allows them to end up with some nice gems once polished. “We don’t have to get all of these picks right,” says David King, a senior portfolio manager for


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