In early 2017, Mark Finn, manager of the T. Rowe Price Value Fund, noticed something a bit off about a meeting he attended with the top executives at General Electric, a longtime holding in the fund and over the years one of its largest positions. Jeffrey Bornstein, then the company’s CFO, seemed to be waffling on GE’s ability to meet its $2-a-share earnings goal, preferring instead to stress the “quality of earnings.” Sensing something was up, Finn and his analysts determined that things were going downhill more quickly than management seemed to be letting on.
The decision to exit the stock proved to be a decisive move, and the fund avoided a massive drop in GE’s stock price later in the year after the company’s earnings came up short of expectations.
GE has been just one of a number of minefields the fund has navigated since Finn took over in 2010. One of the first mines he avoided was Avon. He inherited the cosmetics company from the previous portfolio manager, and it was having a hard time competing with online retailers. As a new manager, he maintained the position for 18 months before finally selling the shares at an average price of $15. The stock now trades at just over $2.
If a fund holding’s fortunes seem to be heading south, Finn tries to determine the reasons and find out whether there’s a clear path back on course or if something more damaging is afoot. “One thing I do particularly well is avoid problems,” he says. “If a thesis is not playing out, if margins are not expanding, I have to understand why.”
One of the fund manager’s core skills is buying reasonably priced stocks of high-quality companies facing some sort of controversy or investor neglect. Sometimes, as in GE’s case, the seed for a sell decision may take hold because the fund managers have misgivings after meeting with a company’s management. At other times, the original thesis for owning the stock simply isn’t panning out.
On Finn’s watch, the fund has managed to excel in both the long and short terms. In 2017, a difficult year for value funds, the T. Rowe Price fund’s institutional class shares returned 19.16%, while the Russell 1000 Value index returned only 13.66%. The fund won an average annualized return of 9.19% over three years while the index returned only 8.65%, and the fund’s 15.17% five-year return, meanwhile, beat the index’s 14.04%. The 8.56% annualized return over 10 years beat the index’s 7.10%.
Finn says he’s able to get at the root of problems using skills he picked up over a varied career. After graduating from the University of Delaware with a degree in accounting, he took a job with Price Waterhouse and later obtained a certified public accountant designation. Five years later, he started with T. Rowe Price in its accounting division. He soon realized that his passion was investing, and he obtained a CFA designation in the early 1990s.
For most of that decade, he focused on bankruptcy and distressed debt investing. By 2001, he had spent a lot of his time analyzing high-grade utility bonds that later became high-yield, lower quality credits. Many of these investment-grade utility dropouts became fodder for equity ideas, which he shared with T. Rowe Price’s stock analysts. In 2004, he joined the equity division as an analyst for utilities, tobacco and other industries.
He believes the variety of his experiences helps him understand bond covenants, capital structures, the impact of bond ratings and other aspects of companies that traditional equity analysts might overlook, even though these qualities reveal key signs about a company’s financial health. When he’s analyzing a stock, he often finds himself consulting with T. Rowe Price’s high-yield bond analysts to get their perspective on the potential impact of a company’s problems.