Portfolio Manager Perspectives

Jeff Benjamin

Easy pickings long gone for contrarian investors

But Hartford Value Fund's Karen Grimes says she's still been able to uncover values, such as retailer Target

Mar 19, 2010 @ 2:27 pm

By Jeff Benjamin

The homework assignments are getting more difficult for contrarian value investor Karen Grimes, who manages the $400 million Hartford Value Fund Ticker:(HVFAX).

That doesn't mean that she isn't still able to find interesting investment opportunities, said Ms. Grimes, who manages the fund at The Hartford Financial Services Group Inc.

“Six months to a year ago, there were a lot of opportunities to buy distressed companies, but the opportunities and challenges are different today,” she said. “We've had to do a lot of analysis and trust that analysis in order to make some investment decisions.”

A big part of Ms. Grimes' investment strategy is to distinguish a company's “temporary problems from more significant issues.”

“I like to buy good companies that are out of favor,” she said. “But I try to look at things different from the market.”

One example is Target Corp. Ticker:(TGT), which saw its stock price decline following sales shortfalls along with pressure on the company's credit operation during the market turmoil a year ago.

“This was not, I thought, an impaired company,” Ms. Grimes said.

Target shares gained 42% last year, following a 29% decline in 2008.

The S&P 500, by comparison, gained 26% last year and fell by 38% in 2008.

The issue with Target, according to Ms. Grimes, was largely rooted in some merchandizing decisions that didn't fit with the market's perception of the chain as being a higher-end retailer.

“I like to look for companies when they are under pressure in the market,” she said. “A lot of times, the markets like to wait for some kind of confirmation [that the problems are temporary], but we do the research, so we know ahead of time.”

The portfolio of about 75 stocks historically has had a 40% average annual turnover, though the past 18 months has seen turnover climb to about 65%.

As a bottom-up stock picker, Ms. Grimes doesn't spend a lot of time worrying about sector weights. But she did acknowledge that “the valuations of health care stocks have gotten incredibly attractive.”

After more than a year of congressional health care reform battles, she said that the managed-care subcategory is shrouded in uncertainty — but holding lots of cash.

“Health care reform has implications of price controls, and the industry wants to make sure they understand reform before they get in a position to pay dividends,” Ms. Grimes said.

“Health care reform and financial services industry regulations are two areas where we're looking for new information every day,” she said.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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