Profits From Bucking the Market
RiverSource Diversified Equity Income has been running rings around its rivals in recent years. It was in the top 10% of large-company value funds in 2003, 2004 and 2005, as well as in the fist five months of 2006. Over the past three years through May 31, the fund returned an annualized 22.4%, about nine percentage points per year ahead of the average large-company value fund. It ranks third among all of its peers for that period.
Managers Warren Spitz, Laton Spahr, Steve Schroll and their team of nine analysts attribute the fund's success to the way they vet investment ideas. First, they use typical measures favored by bargain hunters, such as price-earnings and price-to-book-value ratios. Then, managers pair up their analysts, who have an average of 17 years of experience, from different sectors to debate economic trends with them. "The process generates our version of a Socratic discussion," Spahr says. "It allows us to take something half-baked and boil it down into some specific themes in the portfolio."
Here's how it works: In one recent pairing, the automotive analyst and health-care analyst teamed up to consider the merits of the Big Three automakers. That wide-ranging discussion led them to focus on retirement and health obligations at General Motors (symbol GM). From there, managers delved into an analysis of health-care inflation and the pharmaceutical industry. Finally, they decided to place a small investment in the troubled automaker because they think the market has overestimated GM's woes.
Like the GM bet, the managers prefer stocks that buck the market consensus. But it's particularly challenging to find worthy contrarian picks among large-company stocks because they are so closely covered by analysts and other investment professionals. "Our big successes have been mid caps and stocks at the lower end of the large-cap spectrum," Spitz says. He took over the fund in 2000 after a 13-year stint as a portfolio manager at Prudential Financial. Schroll and Spahr joined as managers in 2004.
Airlines have helped keep Diversified Equity Income flying recently. The managers swooped in to buy Continental Airlines (CAL) and AMR (AMR), parent company of American Airlines, as many investors were selling those stocks on fears that energy prices would hurt profits. But airlines have managed to raise ticket prices while keeping seats filled. "So in an environment where energy prices have been escalating, we have been able to make significant money in airlines," Spitz says.
The RiverSource funds, which are generally sold through brokers and other third parties, levy commissions. The class A shares (INDZX), for example, impose a front-end sales charge of 5.75%. Another potential drawback is that the fund's managers and analysts are busy with other projects. They also run RiverSouce Dividend Opportunity, RiverSource Equity Value and RiverSource Mid Cap Value, as well as private accounts.