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  • Home>Research & Insights>Investment Insights>Contrarian and Concentrated

    Contrarian and Concentrated

    Poplar Forest Partners is promising for risk-tolerant investors.

    Alec Lucas, 10/17/2017

    This article is adapted from the fund’s Morningstar Global Fund Report dated July 14, 2017. Central to this report is the Morningstar Analyst Rating, which evaluates funds on five key pillars.

    A deepened understanding of the approach of Poplar Forest Partners IPFPX since its late 2007 separate-account origins suggests it has merit over a full market cycle. Although extreme volatility means patience is often required and lofty fees detract, veteran manager J. Dale Harvey has the skill to deliver long-term outperformance. The fund’s Morningstar Analyst Rating has been upgraded to Bronze from Neutral.

    Harvey builds a roughly 30-stock portfolio using a contrarian and benchmark-agnostic approach. Heightened volatility comes from his proclivity to invest early in out-of-favor stocks like top-10 holding Signet Jewelers SIG. When Harvey first bought Signet in late 2016, concerns about its Zales acquisition, customer financing, and the threat of Internet retail had already cut its share price in half. After disappointing sales and scandal, its stock fell about a third more in 2017’s first half. Harvey remains committed, however, as he believes its brick-and-mortar jewelry business will survive and the firm’s normalized earnings power makes it a bargain.

    Harvey won’t get every call right, but his background breeds confidence. Before founding Poplar Forest Capital in 2007, Harvey spent 16 years working at Capital Group, contributing initially as an analyst and beginning in mid-1996 as a portfolio manager to strong offerings, including American Funds Washington Mutual AWSHX.

    At Capital Group, Harvey’s volatile style could be muted by combining it with other approaches, but here it is on full display. The fund finished in the category’s top 1% in 2013’s rally and in the top 3% in 2016, when value stocks came back into favor, but lost more than most in 2011 and the 2015–16 correction.

    The fund has a competitive record since its year-end 2009 inception, though, and the strategy has a greater edge when evaluated from the 2007 start of the separate account. Risktolerant investors should give it a look.

    Process Pillar: Positive
    Harvey uses a contrarian, concentrated, and benchmark-agnostic approach. Working as part of a six-person investment team, he seeks midand large-cap stocks with the potential of at least 15% annualized returns over the next three to five years. That means he’s looking for businesses trading at a roughly 33% discount to his intrinsic value estimate over the shorter holding period and a 50% discount over the longer one. Harvey focuses on normalized free cash flow and requires that 85% of the fund’s assets are in investment-grade, dividend-paying companies. When betting on below-investment-grade firms, he insists on a greater margin of safety and only buys if his bear investment case does not involve the permanent loss of capital.

    is an analyst of active strategies on the manager research team for Morningstar.