Morningstar Magazine - October/November 2017 - 67

Harvey tends to keep sector exposures below 25%
of assets, but that's not a rigid guideline
as financials stocks topped 30% in 2012. Cash
is typically less than 5% of assets.
Harvey plans to close the fund at $7.5 billion to
preserve its ability to buy the Russell 1000 Index's
smallest names. As of March, the fund's
44.6% combined small- and mid-cap stake ranked
in the large-value category's top decile.
Performance Pillar: Neutral ¶
The fund's concentrated portfolio, hefty
mid-cap weighting, and proclivity to invest early
in out-of-favor stocks have combined to produce
competitive but extremely volatile results.
From its year-end 2009 inception through June,
the fund's 12.1% annualized gain lagged
the Russell 1000 Value Index by 41 basis points.
While it placed in the large-value category's
top third over the same period, the fund
was one of the most volatile, as measured by
standard deviation.

Poor downside protection isn't inevitable, though.
This fund's older separate account clone held up
better than the benchmark during the credit
crisis. The same separate account also shows the
strategy can be effective over the long haul.
Since its late 2007 inception, the separate
account's 8.5% annualized gross return through
June beat the index by 2.7 percentage points.
People Pillar: Positive ∞
Before founding Poplar Forest Capital in
2007, where he serves as CEO and chief investment
officer, Harvey already had about two decades
of industry experience. He started as an analyst
at Morgan Stanley in the late 1980s and
subsequently spent 16 years at Capital Group,
contributing initially as an analyst and
beginning in mid-1996 as a portfolio manager
to strong offerings, including American
Funds Washington Mutual.

Shortly after founding Poplar Forest, Harvey
launched the flagship Contrarian Value Partners
strategy as a separately managed account
in late 2007 and then this fund, its open-end
mutual fund counterpart, at year-end 2009. He has
more than $1 million invested in the fund.

The fund's aggressive profile can be a boon
for investors. The fund finished in the category's
top 1% in 2013's rally and in the top 3% in
2016, when value stocks came back into favor.
On the other hand, investors must also
be prepared for big losses in market downturns.
Battered financials stocks like Bank of America
BAC hurt the fund in 2011, and it finished
that year with a bottom-quintile 4.8% loss. More
recently, energy holdings drove the fund's
underperformance during the 2015 -16 correction.

Harvey manages two sibling strategies as well.
Since year-end 2014, he has comanaged, with
Derek Derman, Poplar Forest Cornerstone IPFCX,
an allocation-50% to 70% equity fund. At
year-end 2016, Harvey joined Stephen Burlingame
as a comanager of Poplar Forest Outliers IPFOX
to help turn around that mid-cap blend fund.

Style Map 08/31/2017

Regional Exposure Stats 08/31/2017

Giant Large Mid
Small Micro
Deep Value Blend Growth High
Value
Growth

Parent Pillar: Neutral ¶
Founded by Harvey in 2007, Poplar Forest Capital
has a stable investment-oriented culture
centered on its contrarian three-fund lineup. With
Harvey as its driving force, the firm's sixmember investment team includes Derman and
Burlingame, who also serve as financials and
healthcare analysts, respectively. Both joined the
firm in 2011 and are partners alongside Harvey.
Tech analyst Catherine Lloyd and consumer
analyst Peter McAniff have served since 2007 and
are also partners. Energy and materials analyst
Akash Ghiya joined the firm in 2016.

While it's still early going for two of the
funds, performance has been mixed. Flows have
been respectable, but the funds are small
and fees are above average overall. Add
in significant key-person risk, and the firm receives
a Neutral rating.
Price Pillar: Negative §
Since its year-end 2009 inception, a waiver has
kept the expense ratios for the fund's retail
and institutional shares at 1% and 1.25%, respectively. However, both share classes have
above-average costs compared with similarly
distributed shares. Breakpoints will make the fund
cheaper as it gets bigger. After the first $250
million in assets, the 1% management fee drops to
0.8%, and then to 0.6% after $1 billion. K
Alec Lucas is an equity strategies analyst with the manager
research team at Morningstar Research Services.

Rolling-Returns Summary 08/31/2017
72%

Centroid:
Weighted avg. of
equity holdings

11
11
7

Zone: 75%
of fund's equity
holdings
Americas:
98.7%

Europe &
Africa:
1.3%

36-Month Rolling Periods
166 Observations, 13 Years.
The shading and percentages
correspond to how often the
fund's returns landed in each
category quartile.

Asia &
Australia:
0.0%

global.morningstar.com/Morningstarmagazine

67


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