How are your mutual funds doing this year? Let's look under the hood of $112.3 million Towle Deep Value fund (TDVFX). It's one of the precious few stock mutual funds that is not only outperforming the broad market but is up.
How has it managed that feat?
For one thing, the fund is light on technology stocks. For years, overweighting technology stocks was vital to any mutual fund hoping to outperform. Not now. Tech stocks — especially pricey high-flyers — have been albatrosses around the necks of funds this year.
Towle Deep Value Fund's tech weighting was a sparse 4.5% as of March 31.
Mutual Funds: One Winner's Strategy
For another thing, the fund utilizes a deep-value strategy. Unlike growth-oriented mutual funds that grab shares in hot growth stocks as they run up in share price, Towle "emphasizes the purchase of (stocks of) companies believed to be substantially undervalued relative to their private market worth and normalized earnings power," fund literature says.
The fund aims to buy "out-of-favor companies possessing significant appreciation potential," the fund said.
And don't expect those kinds of stocks to realize their potential price appreciation any time soon. "The Fund is intended for investors possessing a minimum investment horizon of three years and preferably longer," according to the fund. "It is not designed to provide investors a way to speculate on short-term movements in the stock market."
Further, the fund makes no effort to serve as a core holding for anyone's portfolio. "This fund does not provide broad sector exposure nor does it emulate the composition of a particular benchmark," the fund's website said. "Investors should maintain diversified holdings of securities and not consider this fund their sole source of equity exposure."
In addition, count Towle Deep Value as one of those mutual funds that screens stocks for ESG (environmental, social and governance) factors. The fund does not invest in tobacco, liquor, or gaming companies.
Just One Tech Stock
The fund's technology play consisted of a single stock as of March 31. DXC Technology provides information technology consulting, outsourcing and support services.
The Virginia-based company has a market capitalization of just $8.4 billion. It completed its acquisition of Luxoft, a Russian-founded IT services company, in 2020. Since early March, DXC has been exiting Russia due to the Putin invasion of Ukraine.
DXC is up 9.41% this year going into Wednesday. That's largely due to shares having gapped up 16% last Thursday, nearly another 3% on Friday and 0.4% on Tuesday.
Last week, the company reported fiscal fourth-quarter revenue of $4.01 billion. That was down 8.6% vs. the year-earlier period. It was below previous guidance. Management blamed a strengthening U.S. dollar. The company also said that exiting its Russian business and the associated distraction caused most of its organic revenue miss vs. guidance.
Undervalued? The stock fits the profile of a company that Wall Street's Smart Money seems cautious about. Ownership of DXC stock by mutual funds fell to 1,064 funds as of March 30. That was down from 1,083 on Dec. 31 and 1,095 as of Sept. 30, according to analysis by MarketSmith.
Best Performing Stocks
The fund's biggest sector weighting was consumer cyclical, at 48%. That group includes footwear retailer Foot Locker, apparel chain Gap and homebuilders Beazer Homes USA and M/I Homes.
None of those four is up so far this year. Year-to-date setbacks range from Foot Locker's 23% loss to Gap's nearly 36% drop.
In contrast, the fund managers have just 22% of their shareholders' money in energy stocks. But that sector accounts for the bulk of the fund's gains this year.
Petroleum refiner and marketer CVR Energy is up 107% this year. Delek US Holdings, which refines petroleum, runs convenience stores and gas stations and transports refinery products, is up 95%. Oil and gas field services provider Liberty Energy is up 68%. Refiner and marketer HF Sinclair is up 51%.
Compared To Other Mutual Funds
How is the fund doing this year? While the broad market in the form of the S&P 500 is down 12.76%, the fund is up 5.53%. Its small-cap value peer group tracked by Morningstar Direct is down 6.16%.
The fund opened in late 2011. Over the past three years, its average annual gain was 21.07% vs. 16.44% for the S&P 500 and 13.83% for its direct rivals.
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