How do some mutual funds thrive amid the threat of a recession? Check out $112.3 million Towle Deep Value Fund (TDVFX). The fund is in the minority of actively run U.S. stock funds that are beating the broad market in the form of the S&P 500.
Towle Deep Value is outperforming with a positive return of 3.03% this year going into Thursday, according to Morningstar Direct. That puts it nearly 13 percentage points in front of the S&P 500, which is down 9.44%.
The fund's small-cap value rivals tracked by Morningstar are down 4.23% this year.
Towle Deep Value's positive return tops 95% of its small-cap value peers.
Recession Hotshot
True to its name, Towle Deep Value Fund seeks stock in companies that are out-of-favor but have a lot of potential to run up in share price.
That's proven a winning formula this year as investors wonder whether the U.S. or even the globe is about to slide into a recession.
Towle Deep Value Fund shows no signs of changing its stripes in response to a recession's possible onset.
Potential Volatility
Fund literature warns that the fund's strategy can be volatile. One reason for that unsettled nature is that the fund's managers limit their portfolio to a relatively small group of stocks. The fund generally holds just 25 to 50 positions. Now, it's got 27 holdings.
If a recession sets in and disrupts stocks, that could add to the fund's volatility.
Its tight fist-like focus give the portfolio punching power at a time like the present. But the fund's focus on a relatively small number of names means this portfolio can take a long time to show positive results.
Unless you can wait for this fund to do well, think twice before buying shares, the fund warns potential shareholders. "Because the fund maintains a concentrated portfolio of out-of-favor stocks, the fund's investment approach typically has a long-term time horizon and the fund may underperform its benchmark for extended periods of time," the fund's summary prospectus points out.
CAN-SLIM Traits
Still, the portfolio includes names that make sense to IBD readers. Seven holdings have IBD Composite Ratings of 90 or higher.
A Composite Rating of 90 means that a stock is in the top 10% of all stocks on a number of technical and fundamental factors, including both price performance and earnings. Especially in a volatile market, watch for stocks that have 90-plus Composite Ratings and are forming bases or are in follow-on buy areas. That way, you spot the best-positioned stocks before they start big price runs. Look up a stock's Composite Rating at IBD Stock Checkup.
Twelve Towle Deep Value Fund holdings have an SMR Rating of B or A.
IBD SMR Ratings measure Sales, profit Margins and Return on equity. IBD's SMR Rating scale runs A through E. An A score ranks in the top 20% of all stocks based on those gauges.
Contrarian Strategy
If you're looking for a fund that rigidly tracks a particular benchmark, this fund likely is not for you. The fund labels itself contrarian. It has an "independent viewpoint," fund literature declares. "No attempt is made to manage the portfolio against the composition of a benchmark."
For the sake of comparison, the fund measures its performance against the Russell 2000 Value Index.
And another reflection of its willingness to be concentrated is its heavy plunge into a single sector. Forty-four percent of its holdings as of June 30 were consumer cyclical stocks.
If Towle Deep Value were run by conventional managers rather than contrarians, it is unlikely it would be so loaded with economically sensitive stocks with a recession threatening.
Only two additional sectors had double-digit weightings: energy, at nearly 15%; and industrial, at almost 12%.
Further, the fund applies ESG values to its buys. It abstains from investments in tobacco, liquor and gaming companies.
Change Amid Threat Of Recession?
As for what the fund does hold, 84% of fund assets were in stocks as of June 30. Nearly 16% were in cash or cash equivalents.
And the fund holds mainly smaller stocks, especially at the time they are first bought. The bulk of holdings have market capitalizations under $5 billion. Fifty-five percent had market caps of $400 million to $3 billion.
That seems to be another way that this fund forgoes conventional thinking. Conventional thinking would likely lead a portfolio that has market-cap flexibility to stocks in larger, financially stronger companies with a recession threatening.
Instead, this fund marches to its contrarian drummer.
Stocks In This Portfolio
The fund has gotten a lot of mileage from its energy stakes. HF Sinclair, an oil and gas refiner and marketer, is up 61% this year. It has a high-octane 3.1% dividend yield. It has a 98 IBD Composite Rating and a C SMR Rating.
CVR Energy, which refines and transports oil and gas, is a four-bagger, with a 107% total return this year. Its dividend yield is 4.8%. The stock's Comp Rating is 91. Its SMR Rating is a C.
Designer Brands is among the fund's consumer cyclical holdings. The athletic shoe-store chain operator is up about 31% this year. It sports a 1.1% dividend yield. The stock has an IBD Composite Rating of 90. Its SMR Rating is a B.
Avnet, a distributor of electronic parts, is up about 9% this year. Its dividend yield is 2.3%. The IBD Composite Rating of the stock is 84. Its SMR Rating is B.
Ryerson Holding, which processes and distributes industrial metals, is up about 20% this year. Its dividend yield is 2.3%. The Composite Rating is 92. Its SMR Rating is an A.
HF Sinclair, Designer Brands and Avnet are top-20 holdings.
Over the past 10 years, Towle Deep Value Fund's average annual return is 11.82% vs. 13.86% for the S&P 500 and 9.9% for the fund's small-cap value peer group.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform.
