Steve Rogers, CEO of Shelton Capital Management and Portfolio Manager of the Shelton Core Value Fund (EQTIX), manages the five-star value fund featured in the November issue of Barron's magazine, in U.S. News and World Report's “Best Mutual Funds,” and ranks among Louis Rukeyser's Top-100 Mutual Funds.
Gregory Taggart, Quicken Blog writer, had a chance to interview Rogers about value investing, including why he thinks value investing is the safest way to buy stocks and investment advice for beginners.
What is value investing?
Rogers: For the man on the street, the best way to describe value investing is “looking to buy companies that are on sale, just like you might buy clothing or a car on sale.” Value investors try to identify interesting investments that are inexpensive, relative to similar investments. Value investors try to find companies that trade at inexpensive multiples.
Experienced value investors talk about price to sales, or price to book, or price to earnings ratios. For example, if you look at the banking industry and they're all trading at a price/earnings ratio of 10, and if you find a comparable bank trading at a price/earnings ratio of 6, you're getting an earnings yield in the first case of about 10% and in the second, about 16%.
Why should an individual investor include a value fund in her portfolio?
Rogers: Value investing has the lowest risk characteristics relative to other equity investment styles. Generally, with a value investment, you're buying discounted companies. If you believe stocks follow a normalized distribution curve over time, theoretically, a value stock is already on the left-hand side of the distribution curve, so your downside is generally less. Value stocks also tend to exhibit less volatility in terms of investment value than say, growth stocks. I believe value investing is the safest way to buy stocks.
What risks are inherent in value investing?
Rogers: The primary risk is the market might see something that you, as an investor, don't see. In other words, if a stock has an 8% dividend yield, and it's trading at 5 times its current earnings, it may look like a very attractive investment because a 5 P/E represents a 20% earnings yield–and you're getting 8% of that as a dividend.
Without further research, that may look like the greatest value ever, when, in fact, maybe it's a defense contractor about to lose 70% of its revenue; and most of the market understands that but you don't. So, there are bad reasons why stocks are priced low. The question I ask myself regularly is, “What do other people see that I'm not seeing?”
How do you mitigate that risk?
Rogers: Diversification, because you're going to be wrong sometimes. You can be a very successful equity manager by being right 55% or 60% of the time, as long as you're careful. I rarely have a significant overweighting in one industry or one security. I make my living by hitting lots of base hits, very few homeruns. If I have runners on second and third, I want to slap one into right field, take first base, and score two runs. Swinging for the fence is not my style.
How do you evaluate these stocks? Do You Visit the Companies?
Rogers: I don't. I know investment managers who do, but I don't find that information particularly useful. Inevitably, somebody at the company is telling a story and they're some of the most biased storytellers around. That information can be as dangerous as it is helpful. I find my office research works best for me, personally. That's my style. I can cover a lot more terrain by staying in my office than I can by boarding an airplane.
What is your benchmark?
Rogers: My benchmark is the S&P 500. That's what investors should earn if they're not engaging in active management. I believe value investing is the best way to outperform that benchmark over time. [Quickenblog.com: Over the last five years, through the end of May, Roger's fund outperformed the S&P by 4.5%. Over 10 years, the fund outperformed the S&P by 7.11%.]
How does that look on a risk-adjusted basis?
Rogers: On a risk-adjusted basis, I think most of the industry sees us very positively.
What's the best advice you can give a potential value fund investor?
Rogers: These are the things that enable me to be successful: I pay attention to expenses and commissions. If you can find a fund with an expense ratio below 1%, that's good because the one sure thing that impacts your returns are those costs. Expenses are listed clearly in a prospectus. Commissions require a little more research.
You also want a manager who's been in place for some period of time, particularly in a value fund because of the long-term nature of the investment thesis. So, if you're looking at a five-year track record, and the manager's been there just two years, most of the investment ideas he's executed haven't played out. Also, does the manager have a consistent investment strategy?
And the last piece, where I have a big advantage, is the fund a manageable size? Mine is at $155 million dollars right now. With funds under, say, a billion dollars, the portfolio manager has some flexibility. With huge battleship funds that everybody knows about, managers have so much money that their hands are tied. Investors are better served in small and medium-sized portfolios.
How long have you been around?
Rogers: I've been managing this fund since 2002. Ten years.
What attracted you to value investing?
Rogers: It fits with my personality. I mean, I'm an Iowan. I don't waste money. I'm careful with a dollar. Value investing is just consistent with my personality. So, you know, I don't get excited about stocks trading at 60 to 70 price/earnings.
Gregory Taggart, a former bank attorney, is an Orem, Utah-based freelance writer specializing in financial and legal issues. When he's not writing, he teaches American government and writing at Brigham Young University.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on your taxes, your investments, the law or any other business and professional matters that affect you and/or your business.