Portfolio construction leans toward the conservative. The fund typically has more than 100 issues in its portfolio, and the largest position accounts for a mere 2% of total assets. Wallack will sell a stock when it has reached what he considers its full value, even if it means missing out on some momentum-driven upside. Often, he'll take some money off the table when a stock does well, then accumulate more on downturns. He tends to hold the same name for several years, and says the fund's 50% portfolio turnover would be somewhat lower if he didn't "trade around" his positions so frequently.
Wallack's style reflects his nearly 14-year tenure at T. Rowe Price, a shop where managers typically spread their bets and chalk up respectable, consistent gains rather than homeruns. He started as an analyst focusing on natural resources and electric utilities in 1990, and has worked on the fund's investment committee as an analyst since its inception in 1996. He assumed management of the fund at the end of 2000 from Greg McCrickard, who now runs T. Rowe Price's Small-Cap Value Fund. "We're still fly-fishing buddies," says Wallack. "We have a similar view of the world."
From a fund management standpoint, Wallack's view of the world has generally been a pleasant one, with Mid-Cap Value ranking in the top 22% of its group or better in each of the volatile three years since he took over. Although it was down 7.4% in 2002, it still managed to perform better than 84% of its peers, and beat its category average by 5.5% points. Last year it was up 39%, beating its category average by 4.7 percentage points. An overweight position in cyclical stocks, including commodity-based businesses and industrial companies, helped boost performance as companies announced plans to upgrade and expand infrastructure.
Like other Price managers, Wallack has the tailwind of the fund's modest expense ratio behind him-0.96%, compared with 1.54% for the category average. A combination of strong performance for fund holdings, below-average volatility, low expenses and a deep bench of analysts to rely on prompts Morningstar analyst Christopher Davis to consider the fund "one of the most compelling options in the mid-value category."
Cyclical Bets Strong
Some of the fund's best performers recently have been cyclical bets, including metals and mining companies such as Teck Cominco. Wallack began accumulating the Canadian company's shares early last year as an inexpensive play on rising commodity prices. Other top performers in the materials sector, which currently accounts for 9% of assets, include Great Lakes Chemical and integrated mining and metals company Norada.
Another cyclical holding, paper and forest products producer Potlatch, has benefited from a strong housing market and managers dedicated to streamlining operations. Wallack has been purchasing the stock for several years at prices ranging from $20 a share to the mid-thirties. It now trades at $38 a share, still well under Wallack's assigned asset value of $45 a share.
Diamond Offshore Drilling, one of the world's largest offshore drilling contractors, is currently the fund's top holding. Wallack has been adding to the position recently because he believes that the company has a valuable store of idle drilling rigs, which it will utilize as demand for drilling capacity increases. Priced at around $20 a share, Wallack says the stock "trades at or below the market value of the rigs."
Utilities account for about 10% of assets, well above the average for the fund category. "Most people don't think utilities are interesting enough to invest in," he says. "But they are an opportunity-driven investment." For Wallack, that opportunity came in late 2002, after falling electricity prices and the well-publicized financial crises among some high-profile utilities dragged the sector down, and Wallack's interest in the stocks picks picked up. He focused his buying on companies like Texas Utilities, which resisted the temptation to reinvent itself and stuck to its core, regulated businesses. He believes the shares remain significantly undervalued.
Recent disappointments include Bisys Group, a business services provider to insurance agents that has been hurt by a drop in life insurance sales. Wallack still owns the stock because he believes the company's fortunes will turn around with new management and a pickup in insurance sales.