Today, DeGulis believes the stock market is trading within a fair range relative to interest rates and inflation. “A price-earnings multiple of 16.5 to 17 range for the S&P 500 isn’t unusual by historic standards. And history shows the market can sit in mid-teens multiple for a very long time.” He also believes the fund’s active management offers a better opportunity for outperformance than indexing as the bull market ages and individual stock selection becomes more important. “To beat the index, you cannot be the index,” he says. “And we have never been that.”
To qualify for inclusion in the portfolio, stocks must be selling cheaply for their historic multiples and lagging the market for what are likely temporary reasons, such as an acquisition that’s taking a while to digest or a company’s under-recognized financial strength. The portfolio typically holds around 35 to 40 stocks, each of which usually accounts for no more than around 3% of assets. Most of them fall into large-cap territory, although mid-caps are represented as well.
The relative value approach, which compares valuation multiples within a particular industry, has evolved somewhat from the fund’s original methodology. “At one time, we focused on the cheapest 20% of the market, based on price-earnings ratios,” says DeGulis. “We realized we needed to do a more refined value check by applying measures appropriate to a particular industry.”