Solid Stock Fund Manager Likes Financial Stocks

by Alan Lavine and Gail Liberman

The no-load Selected American Shares Fund has grown at an attractive 12.1 percent annual rate over the past 10 years.

That’s not too shabby considering that the S&P 500, and index that measures stock market performance, has grown at just a 10.4 percent annual rate. So you might want to know what its manager, Chris Davis, is up to these days.

Davis is buying undervalued out-of-favor large company stocks with long-term growth potential. He buys at prices that don’t reflect the company’s anticipated earnings growth over at least 10 years. A large chunk of the fund’s assets are in what Davis believes are dominant, well-managed, financially strong companies, which lead in product market share. The balance of the holdings is divided between lesser-known companies and those that have been knocked down in price due to bad news.

By the way, Davis eats his own cooking—a good sign for an investment. The Davis family, active employees and directors have $2 billion of their own money invested in their funds.

Davis likes financial stocks. The reason: Financial companies represent one of the broadest areas of the market in which to find high-quality businesses with growing earnings at value prices. The financial sector includes life insurance, regional banking, property and casualty insurance and investment banking.

So what’s his take on the stock market?

He’s cautious. Despite his fund’s strong performance, he says we live in unsettling times. On the plus side, he says many are optimistic about the recovery later this year, while stock valuations seem to reflect good news. A weak dollar should spur U.S. exports. But there is enormous pressure on corporate earnings as companies deal with higher expenses for pensions, insurance, energy and stock options. Low interest rates and tax cuts have helped the economy and the markets.

Stocks, which make up one-third of the fund’ holdings, include Altria Group, American Express, American International Group, Berkshire Hathaway, Costco Wholesale, Golden West Financial and Progressive.

Of course, it’s never a sure thing when you invest in any kind of stock fund. This fund lost money during the past bear market that lasted three years. Over the past five years, the fund grew at just a 2.4 percent annual rate.

Davis, by the way, also manages the Davis New York Venture Fund, which is sold through brokers and thus, charges a commission. That fund is similar to its no-load cousin.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.