Excelsior Value & Restructuring, a fund that buys the beaten-down shares of companies in transition, is undergoing a change of its own. Effective October 1, the fund -- a member of the Kiplinger 25 -- fell under the management of the Columbia Funds.
In July, Charles Schwab sold Excelsior's previous adviser, U.S. Trust, to Bank of America, which distributes the Columbia funds. The 36 funds in the Excelsior fund family join Columbia's 88 funds, most of which levy sales charges. But do-it-youself investors have no cause for concern -- at least for now. Columbia is still offering all Excelsior funds commission-free (it is also offering A- and C-class load versions for funds sold through brokers and other third parties).
Dave Williams, who has run Value & Restructuring since the fund's inception in 1992, has delivered outstanding results. Over the past decade through September 30, Value & Restructuring (symbol UMBIX) gained an annualized 12%, placing it in the top 2% of funds that invest in large, undervalued companes.
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Williams, who plans to retire at the end of 2009, hunts for solidly managed companies that are working to revamp their businesses through cost-cutting, product improvements, new management, reorganizations, or acquisitions. Although large companies account for half of the fund, nearly 40% of assets are invested in midsize firms and a bit more than 10% rest in small outfits.
Although the fund gained 12% in the first three quarters of 2007, it did hit a rough patch over the summer. From July 19, when the market hit a then-record (it set a new record on October 1), through its trough on August 16, Value & Restructuring sank 14%. By contrast, Standard & Poor's 500-stock index dropped 9% over that period (the fund outpaced the S&P 500 by three percentage points in the first three quarters).
Part of the problem over the summer was the fund's 21% stake in financial stocks, which were hit especially hard by concerns over subprime mortgages, defaults and hedge-fund implosions.
Companies seen as potential takeover targets, another one of the fund's staples, also suffered as many investors began to worry that the great merger and acquisition boom was nearing its end. "One problem for the time being is that the takeover game, at best, is going to slow down, and at worst, will come to a halt," says Williams. One of Value & Restructuring's few holdings to be bought out this was equipment-rental company United Rentals. It was was acquired by private-equity fund Cerberus Capital Management in July.
A big bet on energy stocks has helped Value & Restructuring outpace the market so far this year (the sector accounts for 21% of the fund's $8.8 billion in assets) "Energy has been one saving grace in a very difficult year," says Williams. He remains bullish on the sector: "The market hasn't given oil stocks any credit," he says.
His top holdings include Petroleo Brasileiro (PBR), ConocoPhillips (COP), and Devon Energy Corp (DVN). Williams is especially bullish on Anadarko Petroleum (APC), one of the largest independent exploration and production companies in North America.
Williams recently added JCPenney (JCP) to the portfolio. The department-store retailer's shares, which closed at $64.03 on October 1, trade at a modest 12 times analysts' earnings estimates of $5.48 per share for the fiscal year that ends next January, according to Thomson First Call. "It's wacky that it's that cheap," Williams says. "It should be a screaming buy, but because it's tainted with the consumer label, the stock hasn't performed particularly well."
Columbia hasn't changed the Excelsior Value & Restructuring's annual fees, which stand at 1.05%. However, Columbia did lift the initial minimum investment requirement. It had been $500. It's now $2,500.
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