If the ups and downs of market over the five past weeks have made you seasick, you would be wise to consider a fund that chugs along even in economic monsoons. 1st Source Monogram Equity Income is such a steady eddie.
Hardly a household name, this fund's sponsor, 1st Source Bank, is based in the bustling financial center of South Bend, Ind. Manager Ralph Shive has been investing money for the bank since 1989 and has run the fund since its 1996 launch. He works with a crew of seven portfolio managers who help him research stocks for the fund.
Shive has helmed the fund admirably in stormy weather and given investors a calm ride. During the 2000-02 bear market, 1st Source Monogram Income Equity (symbol FMIEX; 800-766-8938) lost only 4% while other funds that invest in bargain-priced stocks of companies of all sizes lost an average of 16%. Standard & Poor's 500-stock index plunged 47% during the bear market.
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The fund's strategy is simple. Shive looks for stocks he thinks can appreciate by 50% over the next two to three years. The tiny fund, with only $152 million in assets, is nimble enough to buy stocks of small and midsize companies without making a splash and affecting their share prices. Shive, whose fund usually holds 65 to 75 stocks, prefers to have exposure to all sectors of the economy. But he will make bigger bets on some sectors. Currently, he holds fewer financial stocks and owns more stocks of industrial and energy companies. But he is selling some of those industrial stocks and increasing his stake in health care companies, which he expects will perform better as the economy slows.
Shive looks at several factors in determining whether a stock is cheap. He evaluates shares on statistical measures, such as price to book value, price to cash flow and price to sales. He will also scoop up stocks he thinks are inexpensive based on the value of a company's assets. Shive prefers companies with a competitive advantage. Companies with a recognizable brand, an innovative technology or some other edge that insulates them from competition pique his interest. One such stock is Biomet (BMET), a leading maker of knee and hip replacements. Biomet recently agreed to a buyout by a consortium of private equity firms.
In his quest for bargains, Shive looks for assets that analysts may be ignoring. Avery Dennison (AVY), a labeling and specialty chemical company, is a prime example. Shive says Avery has developed radio-frequency labeling technology that makes it easier to track goods, a growing market for the company.
Shive also tries to identify broad themes with the potential to create a tail wind for companies. For example, he's interested in stocks of generic drug makers, such as Mylan Laboratories (MYL), that will benefit as more brand-name drugs come off patent protections. Shive also has invested in Potash Corporation of Saskatchewan (POT) because it is the world's largest producer of potash, a key element in fertilizers and a beneficiary of the current agricultural boom. Shive thinks that food production will continue to expand because of the demand from increasingly wealthy residents of fast-growing developing nations.
1st Source Monogram Income Equity has a fine long-term record. Over the past ten years to March 1, the fund gained an annualized 12%. That beat the average all-cap value fund by a little more than one percentage point per year on average and topped Standard & Poor's 500-stock index by more than four percentage points per year on average. The no-load fund charges 1.19% per year for expenses and requires only $1,000 to start.
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