“Bondholders drive the bus during a controversy,” he says.
But stock analysts can determine whether a problem with a company is temporary. Finn took advantage of the market rout in the first week of February to add to the fund’s holdings in Johnson & Johnson as well as Anthem, two high-quality health care companies that declined in the sell off. J&J sold off after reporting a solid quarter because of fears of increased competition for Remicade, one of its blockbuster drugs. But Finn thinks J&J is still a solid choice because of its strong pharma pipeline. Anthem, a managed-care company, declined after JPMorgan Chase, Amazon and Berkshire Hathaway announced they were forming a health-care company for U.S. employees. While Finn does see a potential long-term threat from the plan, he says it will likely take years before this kind of consortium could have any meaningful impact on Anthem’s business model.
Other holdings look cheap because they’ve either been shunned or overlooked by investors for years. Tyson Foods, which the fund has owned for over three years, sells at about 13 times earnings, up from around 11 times a few years ago. Nonetheless, it’s cheap next to comparable consumer brands such as Hormel. Tyson continues to change its image from a chicken manufacturing facility into a more branded, recognized product name that sells prepared foods such as nuggets and fillets.
Another fund holding, Keysight Technologies, has strong free cash flow and trades at just 14 time earnings. The hardware and software maker, created by a spinoff of Agilent Technologies in 2014, produces electronic testing equipment and will help Verizon deploy its 5G networks.
“Passive Investing Is Peaking”
The work of active managers might seem quaint or outdated. As passive and quantitative mutual fund and ETF investments continue to gobble up market share, Finn belongs to a style of investing that requires him to meet with the management of companies, go beyond numbers and make judgment calls. In a report last year, Moody’s Investors Service estimated that passive investments would overtake active investment market share sometime between 2021 and 2024.
But Finn, 55, believes his fund’s ability to ferret out value—and sidestep problems like GE’s—illustrate the value of active management. At the same time, the fund’s low expense ratio of 0.64% for the institutional class means it isn’t that much more expensive than many indexed products.
“Passive investing is peaking,” Finn maintains. “We are later in the economic cycle, a time when the divergence between the fortunes of companies is growing. Those conditions provide fertile ground to employ active management with strong analysts and a manager willing to dig for new ideas.”
Nonetheless, he says the growth of passive and quantitative investing has made the role of an active manager more challenging since he took over the fund a little over eight years ago. The increase in indexed investments means that stocks, even those within the same sector, have a higher correlation with one another than they have in the past. Finn says he tries to differentiate the portfolio by uncovering attractive company attributes that others aren’t seeing, buying stocks on the cheap and allocating 3% to 5% of assets to his highest conviction names. The rise of quantitative investing has shortened the time it takes for stocks selling at unusually cheap prices to pop up on the radar screens. “When you have a unique insight, the time it remains unique is shorter,” he says.