A Hated Wall Street Strategy Helps This 88-Year-Old Fund Beat the Market

(Bloomberg) -- At least one investor is winning with Wall Street’s worst-performing trade.

While cheaper stocks have underperformed in the last decade, Eaton Vance Management’s 88-year-old Large-Cap Value Fund, one of the oldest U.S. mutual funds, is beating the market and peers this year in defiance of the overall trend. Value can be a winner if you look at the right metrics, according to Edward J. Perkin, the chief equity investment officer who oversees $45 billion at the Boston-based firm.

Investors who are limiting stock selection to more traditional metrics such as price-to-earnings and price-to-book ratios risk getting involved with businesses that are burdened by leverage and insufficient cash flows, says Perkin. Instead, Eaton Vance is focusing on enterprise value to find companies with strong balance sheets that can benefit from a cyclical recovery.

“There are some businesses that may look cheap but either they have too much debt or they’re not set for sustainable earnings growth. So if you’re a value investor, tread carefully because there’s a lot of risks in that part of the market,” said Perkin in a London interview.

Eaton Vance’s bets include Qualcomm Inc., Walt Disney Co. and compressor-maker Gardner Denver Holdings Inc., all of which have posted double-digit rallies this year. That’s helped fuel a 15% return for the Eaton Vance Large-Cap Value Fund and a 16% gain for the Eaton Vance Focused Value Opportunities Fund. Both have beaten more than 90% of peers as well as outperformed the S&P 500 and the Russell 1000 Value indexes in 2019.

“Quality cyclicals is the most interesting part of the market,” said Perkin. “The defensive stuff is too expensive and the deep-value stuff may be cheap but comes with too much risk.”

Finding quality stocks that aren’t near record highs is a challenge after this year’s low-conviction rally in equities fueled inflows into defensive assets. As a result, U.S. strong balance-sheet stocks are trading near the highest valuation since at least 2008, according to data from Goldman Sachs Group Inc.

Value’s image as a laggard is legendary. Cheaper stocks that promise higher dividend payouts have underperformed global equities and growth equivalents nearly every year since 2007 as investors embraced companies with booming profits or flocked to low-volatility equities. Among factors tracked by Bloomberg, value is the worst performer this year.

Eaton Vance took some profits on equities in its value funds before this month’s trade war-fueled sell-off, turning more defensive, said Perkin. Still, he expects the rally to resume on bets of a U.S.-China deal and as the Federal Reserve keeps rates on hold.

“I think the pain trade is for stocks to go higher,” said Perkin. “The fear in the market will eventually give way to fear of missing out because people will run out of excuses for not being invested in stocks.”

Stocks rallied on Tuesday after the U.S. decided to grant limited relief for consumers and carriers that do business with Huawei Technologies. The Russell 1000 Value Index climbed as much as 0.9% while the Russell 1000 Growth Index advanced 1.1%.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh, Jon Menon

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