Morningstar Magazine - June/July 2017 - 25

Low-Tech Active
Management With
an Edge

managers whose main competitive advantage is
still essentially what Wiseman, BlackRock, and
others claim is disadvantaged today: teaming
with a handful of analysts to research and cogitate
about stocks. Below are a few examples.

AMERICAS

United States

When BlackRock announced the latest retooling
of its equity funds in March, the executive
hired to lead the effort said the era of equity
portfolio managers working with a handful
of analysts in isolation was over. Stock market
efficiency and competition from cheap passive and
quantitative options make it difficult for that
model to achieve sustainable outperformance, said
Mark Wiseman, BlackRock's global head of
active equities.
The way forward for active equity managers,
Wiseman and BlackRock contended, is to have
quantitative and old-school fundamental teams
under one roof, sharing information.
BlackRock has been pursuing this approach to
varying degrees with dubious results for at least
five years. However, many in the financial media
interpreted this equity reorganization as another
death knell for stock-pickers who rely on traditional
gumshoe and green-eyeshade techniques.
The threats to bottom-up equity management are
real, and it is the rare stock-fund jockey who
has not at least attempted to harness technology
to refine and streamline his investment
process. Yet the death of the old-timey stock
selector may be exaggerated. There remain

Q2
2007

Q3
2007

Q4
2007

Q1
2008

Fidelity Low-Priced Stock FLPSX, which has a
Morningstar Analyst Rating of Silver, has the
resources of one of the world's largest money
managers at its disposal. Manager Joel
Tillinghast's enduring competitive edge, however,
is his uncanny ability to hold the fundamental
attributes of hundreds of companies in his
head at one time. Pick any of the fund's more than
800 stock holdings and there is a good chance
Tillinghast, who's aided by a small cadre of
analysts who run a slice of the portfolio, can recite
how it satisfies the tenets of his quality-plusvalue approach. Such intimacy is born of decades
of reading, researching, and modeling.
Stephen Yacktman and Jason Subotky of Goldrated AMG Yacktman YACKX are value investors
first and last. They are also business analysts
who wear out a lot of shoe leather and pencils
getting to know the managers, businesses,
competitors, suppliers, employees, and financial
statements of the companies they add to their
concentrated, iconoclastic portfolio.
Bill Nygren relies on the work of Harris Associates'
central bank of analysts to help populate Goldrated Oakmark Select OAKLX but does a
considerable amount of fundamental stock
research himself. The small analyst squad plies
a disciplined form of value investing that
relies on individuals to judge companies' intrinsic
values so managers like Nygren can in turn
use their judgment to buy when the stocks trade
at discounts to those values.

Q2
2008

Q3
2008

Q4
2008

There is nothing newfangled or intrepid about
Silver-rated Sound Shore SSHFX. Its managers
Harry Burn, Gibbs Kane, and John DeGulis
have employed the same cautious, value-oriented
strategy for decades. They look for stocks that are
out of favor but not severely impaired or dealing
with too many complex issues out of their control.
The managers often wait for signs of improvement
before investing and are happy to forgo initial
gains to avoid false starts and value traps. They do
use valuation and financial health screens to
identify candidates, but a key part of the process
remains evaluating firms' competitive positions by
speaking with companies' managements,
competitors, and customers, and then working up
detailed financial and valuation models.
Dan Culloton is director, equity strategies, for manager
research at Morningstar Research Services.

Our Outlook on Steel Is
Still Negative After
Trump Memo
Share prices for operators across the U.S. steel
supply chain rose in late April after President
Donald Trump dusted off the Trade Expansion Act
of 1962 as a vehicle for potentially tougher barriers
against steel imports. Trump's April 20 memorandum empowers Commerce secretary Wilbur Ross
to investigate "the effects on national security
of steel imports." More specifically, the investigation
will analyze U.S. capacity relative to the country's
needs for national defense requirements, the effect
of imports on the welfare of the industry, unemployment effects resulting from imports, and the
likelihood that global overcapacity can be reduced.

Q1
2009

Q2
2009

Q3
2009
25

Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2017