FUND WATCH


Their Steady Strategy Has Paid Off

The managers of FMI Large Cap study a stock inside and out before adding it to their concentrated portfolio.



You know the old saying, familiarity breeds contempt. In the investing world, familiarity with a particular approach to stockpicking breeds success. Consider FMI Large Cap, a $511 million fund run by Fiduciary Management, a relatively little-known Milwaukee investment company with $4 billion in assets.

Although it's only five years old, FMI Large Cap has quietly built a stellar record using a strategy that its managers have been employing for decades. Ted Kellner and Patrick English, who together launched the fund (symbol FMIHX) at the end of 2001, invest in just 20 to 25 bargain-priced, out-of-favor companies with strong returns on invested capital. ROIC measures how effectively a company uses the money invested in its operations. Over the past five years through June 12, according to Morningstar, Large Cap returned 13% annualized, an average of three percentage points a year ahead of Standard & Poor's 500-stock index. The fund has produced positive returns in each year except for 2002, when it lost 15%.

For more than 20 years, Kellner and English have applied the same strategy to small and midsize companies on another fund, FMI Common Stock. That fund (FMIMX), which closed to new investors in 2004, gained an annualized 12% over the past 20 years through May 31.

Kellner and English use a slew of valuation measures to determine whether a stock looks cheap relative to its history. These include price-to-sales, price-to-earnings, and price-to-cash-flow ratios. "We take a very exhaustive look at a company's historical valuation to see what could go wrong," says Kellner. "That constant hammering gives us a portfolio of companies that will hold up well in most down markets."

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When evaluating companies, Kellner and English look for durable franchises with strong business models and experienced management. If that sounds familiar, it's because the two emulate Warren Buffett's investing style. (They also pen insightful, conversational shareholder letters, a la Buffett.) It's no surprise that Berkshire Hathaway (BRK-B) was Large Cap's biggest holding, at 6% of its assets, as of March 31.

A company in the portfolio that exemplifies FMI's approach is Wal-Mart Stores (WMT). "This is a fallen growth company that Wall Street loved at one point, but issues arose," says Kellner. "Strip the issues away and this is a great business, although the stock has gone nowhere for eight years." Wal-Mart's shares, which closed at $49.28 on June 14, sell at 16 times analysts' estimates of $3.16 per share for the fiscal year that ends January 31, 2008.

FMI Large Cap, which requires a minimum investment of $1,000, charges a reasonable 1.0% in annual expenses.




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