Investment Insights

Jeff Benjamin

Beating competitors with non-correlated large-cap-stock picks

Fund will lag a strong market but protect shareholders during downswings

Sep 20, 2009 @ 12:01 am

By Jeff Benjamin

The immediate future continues to look bright to Tom Forester, manager of the $90 million Forester Value Fund (FVALX). The fund stood out at the end of last year for its 0.4% gain.

The performance, which compared with a 38% decline by the S&P 500, distinguished the fund as the only diversified-equity fund tracked by Morningstar Inc. to produce a positive return for 2008.

“That's the only time I've ever been happy with a return of 40 basis points,” said Mr. Forester, president and founder of Forester Capital Management Ltd.

This year through Thursday, the fund was up 13.5%, compared with a 19.9% average return for the Morningstar large-value category and a 17.9% gain by the S&P 500.

In many respects, the current market is ideal for Mr. Forester's investing style, which is mostly bottom-up stock picking with no fear of taking profits or of moving to the sidelines if things look too dicey.

The 40-stock portfolio has about 8% in cash, the result of some cautiously optimistic profit taking from some of the better performers.

“I don't think we're completely out of the woods yet, although the market seems to think so,” he said. “The initial rally is done, but now we're moving toward the show-me-some-income stage” in fourth-quarter income. Unorthodox might be the best way to describe Mr. Forester's investment strategy.


For much of the past decade, he has relied largely on heavy allocations to cash and S&P call options, with a little stock picking around the edges.

The strategy, which makes him look either like a genius or a loose cannon, depending on your perspective, played a major part in netting the fund a five-star rating from Morningstar over the past three- and five-year periods.

“You can't deny the fund's past performance,” said Morningstar fund analyst Ryan Leggio. “Basically, he viewed the market as being highly overvalued, so he sat in cash and call options until about the middle of 2008.”

From the fund's launch in 1999 through the middle of 2008, Mr. Forester's performance has moved along in a generally upward track that has at times been way out of sync with both its Morningstar peer group and the S&P 500.

In 2002, for example, the fund gained 5.7% and was ranked in the first percentile of a peer group that produced an average loss of 18.7%.

A year later, Mr. Forester's strategy gained 0.3% and dropped to the 100th percentile in a peer group that averaged a gain of more than 27%.

The separation from the pack continued in 2004 when the fund gained 24.2% and jumped back to the first percentile in a peer group that averaged a gain of 13%.

Mr. Forester's move into the market paid off in 2004, but he went back to his cash-heavy hedging technique from 2005 to 2007, during which he lagged behind the Morningstar large-value category while hovering between the 87th and 100th percentiles.

These days, Mr. Forester is holding less cash but is hedging many of his equity positions with put options.

“Now that he's fully invested, we can see that he's a pretty good stock picker,” Mr. Leggio said.

There is little doubt, even to Mr. Forester, that eking out a positive return last year had a lot to do with the fund's assets' growing by more than 50% so far this year.

“We were below everybody's radar screens last year, but now we're starting to get up there,” he said. “We're still a little on the small side, but we're getting up there close to $100 million, where a lot more advisers will start paying attention.”

As Mr. Forester recalls, finishing the year on the plus side wasn't even a sure thing until the last few hours of the last trading day of the year.

The portfolio, which reduced its exposure to mortgage-related stocks in 2007, moved out of financial- sector stocks in early 2008 and shifted toward health care and consumer staples.

By September, the fund had a 30% allocation to cash, but at the conclusion of 2008, it had less than a 5% cash position in a portfolio of 35 stocks, eight of which finished the year with positive returns.

“He is basically an asset allocator — more than just an equity manager,” Mr. Leggio said. “The risks are that this fund will lag when the market is overvalued, but on the downswings, he should save shareholders a lot of money.”

A new Investment Insights column appears every Monday on E-mail Jeff Benjamin at


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