Weitz Investments calls 2014's market tough for active managers

With stocks at 85% to 90% of fair value, money manager socks cash away to take advantage of volatility

Apr 9, 2014 @ 12:51 pm

By Carl O'Donnell

stocks, bonds, equities, fixed income, weitz, valuation, interest rates, duration, fair value
+ Zoom

After last year's 29.6% rally in the S&P 500, the stock market this year is challenging active managers who are looking for good deals, according to Wallace Weitz, founder and president of Weitz Investment Management.

In a letter to investors issued April 1, Weitz Investment Management said most stocks in the company's portfolio are hovering at between 85% and 90% of fair value, rather than the 50% to 60% that the money manager would prefer.

“Economic conditions are pretty good, and the pain and fear from the bear market is behind us,” Mr. Weitz said in an interview. “But you have excess money and complacent investors, so it seems like prices have inflated a little ahead of themselves.”

Mr. Weitz said he doesn't see any sectors of the stock market that are significantly undervalued and thinks that investors are more likely to find value on a company-by-company basis. Because of that, the company has put about 20% to 30% of its stock portfolio into cash, with the hope that increased volatility will present some attractive buying opportunities, he said.

(He could be onto something: Market stems sell-off but volatility is here to stay)

Weitz Investment Management, which works largely with financial advisers and holds around $6 billion in assets under management, evaluates companies based on discounted future cash flows projected forward for decades. These predictions don't change very much with the daily vicissitudes of the markets, so big sell-offs — like the crash of 2009 — play to the company's advantage, Mr. Weitz said.

“The biggest frustration we face is watching clients make emotional mistakes,” he said, noting that some investors tend to pull out near the bottom of the market only to buy back in when prices rise.

Despite the company's contrarian philosophy, its funds' returns have been similar to the market. The company's Value Fund (WVALX), for example, returned 22.43% over the five-year period ending March 31, 15.52% over the comparable three-year period and 19.66% in the past 12 months. The S&P 500, meanwhile, gained 21.16%, 14.66% and 21.86% over those time periods, respectively.

Weitz Investment Management also invests in fixed income, where returns have been more modest. The company's Short Intermediate Fixed Income Fund (WEFIX) has gained 4.52% in the five-year period ending Dec. 31, 2.41% in the comparable three-year period and 1.11% last year. This is still significantly better than the Barclay's Intermediate U.S. Government/Credit Index, which earned 3.96%, 2.91%, and -0.86% over the same periods.

The company is mainly treating bonds as a safe haven, sticking with high-quality debt that has an average duration of only two years, thereby minimizing both interest rate and credit risk. While the investment management firm isn't averse to taking credit risk, “the spreads between junk bonds and Treasuries are record small, so we wouldn't be getting paid for the risk we would be taking,” Mr. Weitz said.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

Events

How politics are moving markets

The financial services industry stands at the unique intersection of politics and market fluctuation. Clients are anxious and the right adviser can steady he waters. Scott Kubie of Carson Group explains how.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.

Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry

Mandated contributions to Roth accounts would likely only be partial, as opposed to having a full repeal of pre-tax accounts.

E*Trade acquiring custodian Trust Company of America

Discount broker buying second-tier custodian for $275 million.

Another thousand Dow points higher, and investors yawn

Market milestones keep falling like dominoes, with 51 records broken so far this year.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print