A Value Fund Leaps Ahead of Its Rivals
TCW Relative Value Mid Cap's manager seeks cheap stocks with a catalyst that could spark annual returns of 15%.
Value investing may not be dead after all. After a lousy 2015, in which mutual funds that focus on cheap U.S. stocks of all sizes shed an average of 4.7%, bargain hunters have rebounded impressively. Over the past year, the average value fund earned 10.9%.
Few funds have benefited more from the shift in investor sentiment than TCW Relative Value Mid Cap (TGVNX). TCW lost 12.2% in 2015, trailing the typical fund that focuses on undervalued midsize firms by 6.8 percentage points. But over the past year, it outpaced its typical peer by 5.9 percentage points.
Whether markets are friendly or not, manager Diane Jaffee sticks with her strategy. She starts with stocks with market values of $1 billion to $31 billion. She and her team compare five measures of value—dividend yield and the ratio of price to earnings, sales, cash flow and book value (assets minus liabilities)—for each stock with comparable figures for the Russell Midcap index.
If a stock is cheaper on at least three measures, Jaffee investigates further. Specifically, she seeks firms with catalysts that could help their stocks produce annualized returns of at least 15% over the next two years. Case in point: J.C. Penney. Jaffee upped her stake in the retailer in 2015, after the firm hired a new CEO, who cut costs, emphasized sales of private-label brands and added more Sephora makeup boutiques in Penney stores.