By Philip van Doorn, MarketWatch
We’ve recently been covering money managers’ divergent approaches to historically high U.S. stock prices in what has turned out to be the seventh year of the bull market.
Opinions vary greatly:
Katie Nixon, chief investment officer of Northern Trust Wealth Management, said July 20 that investors should still buy dividend stocks and high-yield bonds, despite rich valuations in both sectors.
FBR & Co. Director of Research David Hilal listed 16 dividend stocks to own, even now, because they offer “an attractive yield and potential share appreciation.” That story was published July 18.
Larry Pitkowsky and Keith Trauner, who manage the GoodHaven Fund /zigman2/quotes/200621018/realtime GOODX +3.56% after previously working for the Fairholme Fund /zigman2/quotes/200889155/realtime FAIRX +3.41% , said in a July 26 story that owning an index fund is a can’t-miss proposition during a bull market, though active management might be a better option during periods of volatility. They listed Barrick Gold Corp. and Staples Inc. as favorite stock picks.
On July 25, Mark Travis, the founder and CEO of Intrepid Capital Funds, didn’t dwell on perceptions that market valuations are high. When discussing the success of an index fund during this current bull market, he said: “Most investors don’t earn what a fund earns,” because they buy high and sell low. In an interview, he focused on his approach to value investing.
“We can lead you to a higher price without heroic assumptions.”
Mark Travis, CEO of Intrepid Capital Funds
Travis manages the Intrepid Capital Fund /zigman2/quotes/201155353/realtime ICMBX +1.83% , which has $340 million in assets, while the company’s total assets are about $900 million. The fund invests in small-cap and mid-cap companies and high-yield bonds.
Citing a study by Dalbar Inc. showing that “over the past 20 years, investors make a much smaller equity return than they would with a blend,” Travis said, “I am trying to help people sleep at night, rather than scare them.”
“On the equity side, we try to figure out what a business would be worth in the private market,” based on price multiples to pretax cash flow, he said. That is an approach that Travis follows whether or not the overall stock market is considered fairly valued. He added that private valuations for companies “seldom” exceed 10 times earnings before interest, taxes, depreciation and amortization (EBITDA).
“We are really short-duration equity investors,” he said. “Meaning the time we have to wait for cash flow to come back to us is shorter than it would be for Amazon, Netflix and Tesla.”
“If you are investing in growth equity that has its cash flows far in the future, you are saying, ‘Let’s see how long I can hold my breath,’ ” he said.
The Intrepid Capital Fund has returned 10.8% this year through July 26, which compares favorably to the 7.4% return for the S&P 500. Like so many actively managed funds, its total returns during the bull market have lagged behind the index over longer periods. Its average annual return over the past five years has been 6.4%, compared with 12.7% for the index. Its average return for 10 years has been 7.7%, in line with the average for the index, according to FactSet.
Morningstar ranks the Intrepid Capital Fund fourth of 915 funds in the “moderate target risk” category, while it ranks in the second-quartile over five years and in the top quartile over 10 years.