11
Morningstar FundInvestor
September 2
014
Change can creep up on fund investors. Occasionally
managers will make big sector shifts that you
wouldn’t want to miss. The moves can alter the risk
profile of the fund and your portfolio, so it pays to
pay attention.
Below are a few funds that have upped their stakes
in certain sectors in the past three years. Bottom-
up stock-pickers run each of these examples; none of
them would say they’re making conscious bets on
particular sectors. Because these fairly concentrated,
benchmark-agnostic managers are comfortable
letting their stock picks gather where their research
leads them, the funds often end up making de facto
sector wagers anyway. It’s worth keeping an eye on.
Jensen Quality Growth
JENSX
is known for its strin-
gent profitability criterion. So, it was surprising to
see that the fund had increased its basic-materials
stake from
1
.
3%
in
2011
to more than
11%
of stocks
as of June
2014
. Basic-materials companies, miners
and those dealing in commodities in particular, aren’t
exactly known as bastions of quality; many struggle
to earn their cost of capital. Jensen’s stake consists
of a big chemical company benefiting from positive
secular change and two industrial-service companies
with strong positions in their markets.
The fracking revolution has lowered the cost of one
of the key inputs of
DuPont
’s
DD
chemical-manufac-
turing process—natural gas. And industrial gas
company
Praxair
PX
and environmental-services
company
Ecolab
ECL
have business models that
generate a lot of recurring revenue. Arguably these
are higher-quality basic-materials companies, but
Jensen’s increased exposure here still bears watching.
For-profit education companies make up virtually all
of
FPA Capital
’s
FPPTX
increased consumer defen-
sive stake, which went from next to nothing to
11%
of
stocks in the past three years. Although the stocks
have recovered from controversies over enroll-
ment growth, job placement rates, and aggressive
marketing tactics, they remain contentious.
FPA
Capital managers say concerns, investigations, and
determined short-selling by hedge funds gave them
the opportunity to buy leaders in a key component of
the U.S. education system at attractive discounts.
DeVry Education Group
DV
is best-of-breed in an
oft-troubled industry, with strong and effective
franchises in test prep and information technology,
accounting, and medical-services training. Mean-
while,
Apollo Education Group
APOL
has abun-
dant opportunities to improve its cost structure
and margins by focusing on student retention and
licensing its technology to other schools seeking
to offer classes online. The positions have paid
off for the fund so far, but they can be volatile
and controversial.
Delafield Fund
DEFIX
is usually more comfortable
in industrial and technology sectors, which typically
have consumed the bulk of their investments.
Managers Dennis Delafield and Vince Sellecchia,
however, also seek companies that look cheap
because of failed acquisitions, management upheaval,
or aborted strategies. In recent years, they’ve found
a lot of those in the energy sector. The fund’s commit-
ment there has increased from nothing to
10%
of
stocks in the past three years as it has snapped up
coal firm
Consol Energy
CNX
, oil- and gas-services
and equipment companies
Weatherford Inter-
national
WFT
,
McDermott International
MDR
,
Boardwalk Pipeline Partners
BWP
, and others.
œ
Contact Dan Culloton at
Did You Notice These New Sector Bets?
Red Flags
|
Dan Culloton
What is Red Flags?
Red Flags is designed to alert
you to funds’ hidden risks. Such
risks can take many forms,
including asset bloat, the depar-
ture of a solid manager, or a
focus on an overhyped asset
class. Not every fund featured in
Red Flags is a sell, and in fact,
some are good long-term hold-
ings. But investors should be
prepared for a potentially bum-
pier ride in the near future.
