Please enable JavaScript to view the comments powered by Disqus.

Fund Watch

Ups and Downs of the Davenport Equity Opportunities Fund

Limited exposure to hot tech stocks had this fund lagging its benchmark in 2015.

Thinkstock

Watching the performance of Davenport Equity Opportunities (DEOPX)over the past two years was a bit like reading Dickens. In 2014, the fund, a member of the Kiplinger 25, experienced the best of times. It returned 15.3%, beating the broad market and 97% of its peers (funds that focus on growing midsize firms).

See Also: Mutual Fund Rankings, 2016

Last year started out well, with Davenport earning nearly 8% through mid July, more than double the gain of Standard & Poor’s 500-stock index. But it all unraveled in the second half, and Equity Opportunities ended the year with a loss of 5.9%, lagging the S&P 500 by 7.3 percentage points and the average mid-cap growth fund by 5.0 points.

One culprit was Discovery Communications, the fund’s largest holding, at 7% of assets. Shares of the television network operator plunged 25% last year, due in part to concerns about cable-cord cutting. Stocks with exposure to commodities and the industrial sector also hurt. For instance, shares of Colfax, which makes gas- and fluid-handling products, lost 55% in 2015. Railroad Genesee & Wyoming, which transports coal and other materials, sank 40%. “Everyone is sour on anything commodity-related,” says George Smith, who manages Equity Opportunities with Chris Pearson. “This past year has been momentum-oriented and was dominated by the FANG stocks: Facebook, Amazon.com, Netflix and Google” (now Alphabet).

But Smith and Pearson don’t gravitate toward stocks that are already on the rise. They prefer out-of-favor firms with solid balance sheets run by executives who act like owners.

Some of the fund’s stocks performed well last year. Longtime holding Markel, which many consider a mini Berkshire Hathaway (Markel sells insurance and also invests in other companies), climbed 29%. And shares of casino operator Penn National Gaming gained 17%. Smith and Pearson have pared back on both stocks in recent months.

Fortunately for shareholders, Equity Opportunities wasn’t entirely free of FANG stocks. The managers first acquired Amazon.com in 2014 and added to their stake when the stock sat at $325. The shares soared 118% in 2015. “At the time we bought it, it was so cheap and so out of favor, and we liked what the firm was doing with its capital,” says Smith. “But generally it’s out of the norm of what we own.” The managers have been trimming their holdings in Amazon as well.

See Also: 7 Great Socially Responsible Mutual Funds