A New Favorite for Value Funds: Technology - Barron's

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In many ways, Jamie Wilhelm epitomizes the value investor. Early in his career, he studied Warren Buffett’s publicly traded investment decisions going back to the early 1970s to understand how he thought about value. Wilhelm quotes Buffett-isms and counts Bruce Greenwald, co-director of the Heilbrunn Center for Graham & Dodd Investing at Columbia University, as a mentor.

So it might come as a surprise that more than 21% of assets in the $1.4 billion Touchstone Focused fund (ticker: TFOAX), which he manages, are in information technology. There are also some significant bets on individual companies not typically thought of as “value” stocks in that sector: One of the fund’s largest holdings is Amazon.com AMZN 1.147215112577791% Amazon.com Inc. U.S.: Nasdaq ^USD778.52 8.83 1.147215112577791% /Date(1474059600633-0500)/ Volume (Delayed 15m) : 4965140 AFTER HOURS ^USD778.53 0.01 0.001284488516672661% Volume (Delayed 15m) : 534042 P/E Ratio 193.93667638193457 Market Cap 364890022163.572 Dividend Yield N/A Rev. per Employee 522691 More quote details and news » (AMZN), at 3.8% of assets. The fund’s A and C shares of Alphabet GOOGL -0.40687443056300937% Alphabet Inc. Cl A U.S.: Nasdaq ^USD797.97 -3.26 -0.40687443056300937% /Date(1474059600298-0500)/ Volume (Delayed 15m) : 1958363 AFTER HOURS ^USD798.02 0.05 0.006265899720540873% Volume (Delayed 15m) : 172208 P/E Ratio 30.914331539614835 Market Cap 540614648951.328 Dividend Yield N/A Rev. per Employee 1314070 More quote details and news » (GOOGL, GOOG) combined add up to 3.6% of assets, while Apple AAPL -0.562429696287964% Apple Inc. U.S.: Nasdaq ^USD114.92 -0.65 -0.562429696287964% /Date(1474059600338-0500)/ Volume (Delayed 15m) : 74189018 AFTER HOURS ^USD114.94 0.02 0.01740341106856944% Volume (Delayed 15m) : 5697893 P/E Ratio 13.425233644859814 Market Cap 622742340967.882 Dividend Yield 1.9839888618169161% Rev. per Employee 1990500 More quote details and news » (AAPL), at 2.5%, and LinkedIn LNKD -0.09865517420426813% LinkedIn Corp. Cl A U.S.: NYSE ^USD192.4 -0.19 -0.09865517420426813% /Date(1474059744594-0500)/ Volume (Delayed 15m) : 1047350 AFTER HOURS ^USD192.4 % Volume (Delayed 15m) : 148471 P/E Ratio N/A Market Cap 25947723510.1369 Dividend Yield N/A Rev. per Employee 365817 More quote details and news » (LNKD), 2.3%, also stretch the classic concept of value. LinkedIn agreed to be acquired by Microsoft MSFT 0.10491344640671446% Microsoft Corp. U.S.: Nasdaq ^USD57.25 0.06 0.10491344640671446% /Date(1474059600609-0500)/ Volume (Delayed 15m) : 40924505 AFTER HOURS ^USD57.31 0.06 0.10480349344978165% Volume (Delayed 15m) : 3682460 P/E Ratio 27.926829268292682 Market Cap 445653985817.162 Dividend Yield 2.51528384279476% Rev. per Employee 742939 More quote details and news » (MSFT) in June.

Wilhelm’s fund is hardly an outlier. Among the largest large-company value funds, 41 out of 50 have a higher technology weighting than the S&P 500 Value index, which was recently about 8% tech, according to Todd Rosenbluth, director of S&P Global Market Intel INTC 3.036105032822757% Intel Corp. U.S.: Nasdaq ^USD37.67 1.11 3.036105032822757% /Date(1474059600156-0500)/ Volume (Delayed 15m) : 69714851 AFTER HOURS ^USD37.7 0.03 0.07963897000265463% Volume (Delayed 15m) : 4863048 P/E Ratio 18.198067632850243 Market Cap 172965366497.04 Dividend Yield 2.760817626758694% Rev. per Employee 527624 More quote details and news » exchange-traded fund and mutual fund research.

“It’s shocking, not just because so many funds have that kind of exposure to tech stocks, but also because of the kinds of stocks they own,” Rosenbluth says. “Apple is increasingly viewed as a value stock, but Facebook FB 0.5609661082976237% Facebook Inc. Cl A U.S.: Nasdaq ^USD129.07 0.72 0.5609661082976237% /Date(1474059600436-0500)/ Volume (Delayed 15m) : 20905188 AFTER HOURS ^USD129.07 % Volume (Delayed 15m) : 3213986 P/E Ratio 62.05288461538461 Market Cap 368487603167.474 Dividend Yield N/A Rev. per Employee 1746120 More quote details and news » (FB)? It was surprising to see that in some of these funds.”

With nearly $57 billion in assets, the Dodge & Cox Stock Fund (DODGX) is one of the largest portfolios in Morningstar’s value category. While it does not own Facebook, its nearly 23% allocation to technology is almost triple the benchmark’s.

“Our approach to looking at technology is the same as any stocks,” says Charles Pohl, the firm’s chairman and chief investment officer. “We and other value managers have returned to technology in more recent years because the valuations are much lower than they were in the late 1990s.”

To be sure, many of the tech darlings of the late 1990s are now viewed, or have been viewed, as past their prime. “You hear the term ‘secular decline,’ but for every Eastman Kodak KODK 0.4871259568545581% Eastman Kodak Co. U.S.: NYSE ^USD14.44 0.07 0.4871259568545581% /Date(1474059725088-0500)/ Volume (Delayed 15m) : 229212 AFTER HOURS ^USD14.44 % Volume (Delayed 15m) : 7012 P/E Ratio N/A Market Cap 607089408.846245 Dividend Yield N/A Rev. per Employee 261250 More quote details and news » [KODK] there are the Apples of the early 2000s or Microsoft in 2011,” says David Hoeft, Dodge & Cox’s associate director of research.

Long-time holding EMC fell into that camp. Investors shunned the stock thinking its storage business would be made obsolete by the cloud, but the Dodge & Cox team saw value elsewhere in the company, including in its huge equity stake in VMware VMW -1.2540894220283534% VMware Inc. U.S.: NYSE ^USD72.44 -0.92 -1.2540894220283534% /Date(1474059963128-0500)/ Volume (Delayed 15m) : 3107585 AFTER HOURS ^USD72.44 % Volume (Delayed 15m) : 10382 P/E Ratio 29.20967741935484 Market Cap 31134570928.5938 Dividend Yield N/A Rev. per Employee 359053 More quote details and news » (VMW). EMC was acquired by Dell in a deal that closed on Sept. 7; Dell now owns 80% of VMware. The same could also be said of HP HPQ 0.20689655172413793% HP Inc. U.S.: NYSE ^USD14.53 0.03 0.20689655172413793% /Date(1474059760569-0500)/ Volume (Delayed 15m) : 17124059 AFTER HOURS ^USD14.53 % Volume (Delayed 15m) : 1335408 P/E Ratio 7.770053475935829 Market Cap 24807701660.1563 Dividend Yield 3.4136269786648312% Rev. per Employee 213986 More quote details and news » (HPQ) and Hewlett Packard Enterprise HPE 0.587437867148667% Hewlett Packard Enterprise Co. U.S.: NYSE ^USD22.26 0.13 0.587437867148667% /Date(1474059766820-0500)/ Volume (Delayed 15m) : 15490602 AFTER HOURS ^USD22.25 -0.01 -0.044923629829290206% Volume (Delayed 15m) : 858483 P/E Ratio 9.254947613504074 Market Cap 36858332131.2785 Dividend Yield 0.9883198562443846% Rev. per Employee 212608 More quote details and news » (HPE), which together were recently more than 5% of the fund’s assets. (For more on Hewlett Packard Enterprise, see page 23.)

“In the past five years, I’ve seen more opportunities in technology than I’ve ever seen,” says Michael Liss, who co-manages several value-leaning portfolios, including the $3.1 billion American Century Value fund (TWVLX). For Liss and his co-managers, value is clearly defined: A stock must rank in the bottom third of the market on “tried and true” valuation methods and screen well for high returns on capital before they’ll give it a second look. The market might price holdings such as Cisco Systems CSCO -1.501117853720856% Cisco Systems Inc. U.S.: Nasdaq ^USD30.84 -0.47 -1.501117853720856% /Date(1474059600618-0500)/ Volume (Delayed 15m) : 34067181 AFTER HOURS ^USD30.89 0.05 0.1621271076523995% Volume (Delayed 15m) : 3349135 P/E Ratio 14.547169811320755 Market Cap 156999421184.351 Dividend Yield 3.372243839169909% Rev. per Employee 668209 More quote details and news » (CSCO), Intel INTC 3.036105032822757% Intel Corp. U.S.: Nasdaq ^USD37.67 1.11 3.036105032822757% /Date(1474059600156-0500)/ Volume (Delayed 15m) : 69714851 AFTER HOURS ^USD37.7 0.03 0.07963897000265463% Volume (Delayed 15m) : 4863048 P/E Ratio 18.198067632850243 Market Cap 172965366497.04 Dividend Yield 2.760817626758694% Rev. per Employee 527624 More quote details and news » (INTC), and Oracle ORCL -4.747919725893294% Oracle Corp. U.S.: NYSE ^USD38.92 -1.94 -4.747919725893294% /Date(1474059869899-0500)/ Volume (Delayed 15m) : 47311436 AFTER HOURS ^USD39 0.08 0.20554984583761562% Volume (Delayed 15m) : 3392051 P/E Ratio 18.801932367149757 Market Cap 168454749518.268 Dividend Yield 1.5416238437821173% Rev. per Employee 272404 More quote details and news » (ORCL) as dinosaurs, he says, “but these are companies that can sustain high returns on capital because of high barriers to entry.”

This thinking led Wilhelm and his team at Touchstone to buy Amazon.com in late 2014 when shares were trading around $315. “It was a mid-teens return-on-capital business that was priced to become a cost-of-capital business,” says Wilhelm, whose strategy focuses on growing companies that are priced as if they are in the late stages of a business cycle. “We thought high returns were sustainable.”

Amazon is a low-margin, high-asset-turn business that with Prime membership and Dash buttons—which let consumers instantly reorder things like toilet paper by pushing a button—is increasingly sticky. Today, Amazon stock is trading at more than twice what Wilhelm paid, “but returns on capital have improved enough to where it is still reasonably valued,” he says. (Morningstar categorizes Touchstone Focused as a large blend fund due to its holdings outside of the strict value parameters.)

The take-away: “Value is often in the eye of the beholder,” says Rosenbluth. For investors, that’s all the more reason to know what your manager owns, lest you get overexposed to, say, Apple. Also, look beyond fund names and labels to understand how your manager defines value. Wilhelm, for his part, thinks the definition of value is relatively simple: “We believe there are two types of investing: value and momentum,” he says. “Either you care about price, or you don’t.”

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