Cambiar Aggressive Value: A Small Fund with Big Gains
Cambiar Aggressive Value (symbol CAMAX) may be the top large-company value fund over the past year through March 3, but labels can be deceiving. That the fund shows up in this group says more about the peculiarities of Morningstar's categorization system than about what Aggressive Value actually does. True, the fund's current tilt is toward stocks of large, undervalued companies. But Aggressive Value is actually a highly concentrated global fund that invests in companies of all sizes and may even sell stocks short or invest in derivatives from time to time. (Derivatives are investments whose performance depends on the results of other investments.)
Despite the fund's narrow focus -- it typically holds only 15 to 30 stocks -- manager Brian Barish can move nimbly because assets total only $252 million. But if Aggressive Value keeps up its torrid performance, it won't stay small for long. The fund returned a jaw-dropping 68% over the past year, compared with a not-so-measly 21% for Standard & Poor's 500-stock index and 19% for the large-cap value category. So far in 2011, it has risen 19.1%. In fact, assets have already quintupled since the end of 2010.
Barish doesn't have a long record at Aggressive Value, which launched in 2007. But he has achieved fine results since 1998 as the lead manager of Cambiar Opportunity (CAMOX), a more-traditional, though still fairly concentrated fund (with 39 stocks in its portfolio at last report), that invests in large companies with a blend of growth and value attributes.
Barish looks for strong companies that trade at bargain prices. Plus, the companies must have competitive positions in industries that offer sustained long-term growth.
Because cash is king for Barish, he first calculates how much a company could prudently give back to its shareholders in the form of dividends or stock buybacks. He favors companies that have the potential to generate free cash-flow yields of at least 12% (free cash flow yield is a company’s free cash flow --earnings plus depreciation and other non-cash charges, minus the capital expenditures needed to maintain the business -- divided by the company's stock-market capitalization).
After assessing a firm's financial strength, Barish compares current value ratios, such as price to earnings and price to book value (assets minus liabilities), with their historical ranges and competitors' values. He also takes into account big-picture items, such as the economy, oil prices and his views on various sectors.
Because companies can trade indefinitely at cheap prices, timing is everything. So Barish tries to ensure he's getting in at the right time. He looks for turning points in a company's business, such as a promising new product or the spinoff of an unprofitable division. Plus, he employs technical analysis, a practice that involves examining stock-price patterns. "There's a voodoo connotation among investment professionals about technical analysis," says Barish. "But it's important because it tells you when to invest."
The fund's strong start in 2011 is thanks to large positions in Corning (GLW), a maker of ceramics and specialty glass products, including liquid crystal displays; EADS (EADSY.PK), the Holland-based owner of airplane manufacturer Airbus; and Bombardier (BDRBF.PK), a Canadian company that makes planes, trains and snowmobiles.
Barish says he is maintaining his focus on developed markets, with a bias toward the U.S., for the year. He does not think emerging-markets stocks are attractively valued now. Although he still believes in the China story, he thinks China will have an inflation problem until it unpegs its currency from the dollar. "And the chances of that happening are extremely slim at best," says Barish. "Inflation will create domestic social problems in China, and that will make for a difficult investing environment."
The boom in mobile electronic devices is whetting Barish's appetite. Barish predicts that smart phones and tablets will experience tremendous growth for the next three to six years. So he's investing in service providers and producers of semiconductors and components that will benefit from the general trend. One favorite is TriQuint Semiconductor (TQNT).
Another way Barish is playing the smart-device revolution is through the telecommunications sector. Data consumption is exploding along with the burgeoning use of wireless devices and driving growth in telecom businesses. And Barish thinks we're in the early innings for tablets. "Both consumers and businesses will adopt tablets," he says. "So wireless penetration could be greater than 100% because people can have more than one device."
Among the telecom providers, Barish is betting on Sprint (S) and Vodafone Group (VOD). Although Sprint's stock has performed poorly over the past five years, Barish thinks the company is turning around and that the tablets and smart phones offer Sprint new avenues of growth. "Both companies operate in developed markets where consumers are wealthier than in emerging markets and valuations are much better," says Barish. However, he says he's not investing in Verizon Communications (VZ), which owns 55% of Verizon Wireless, because he thinks Verizon's landline business is a drag on earnings.
Cambiar Aggressive Value is not for the faint of heart. Given the fund's narrow focus, expect above-average swings. In 2008, it lost 44%, seven percentage points worse than the S&P 500.