Forester Value: Making a Comeback


Forester Value: Making a Comeback

After several years of poor performance, this large-company value fund now is number one in its class.

When it comes to performance, Forester Value seems to have an aversion to the middle ground: It's either at the top of the heap or at the bottom. Compared with other large-company value funds, Forester (symbol FVALX) was in the bottom 10% in 2003, 2005, 2006 and 2007. But it was in the top 10% of the category in 2002 and 2004 and, with a return of 8.9% through July 30, it's the top ranking large-company value fund and third-best diversified domestic stock fund this year.

What's behind these topsy-turvy results? The main factor appears to be manager Tom Forester's willingness to go on the defensive when he thinks the stock market is overvalued.

For most of the period between the fund's inception in late 1999 and the second quarter of 2004, the fund held a significant amount of cash and bonds. In 2008, Forester used index put options (a bet on falling share prices) to reduce volatility and protect the fund from market losses. "The nice thing about puts is that a little goes a long way," says Forester, who is a protégé of noted bargain hunter David Dreman. "If we are wrong and the market goes up, we don't lose much, but if we are right and the market goes down a lot, the portfolio is protected."

Forester's style pays off during weak markets. During the bear market of 2000-2002, his fund gained 14%, trouncing Standard & Poor's 500-stock index by 61 percentage points. So far in 2008, the fund has clobbered the index by 21 percentage points.


But when Forester guesses wrong, results can be ugly. In 2003, the fund essentially broke even and trailed the index by 28 percentage points. "We held a lot of cash in 2003, and we were wrong," says Forester. He adds with a laugh: "That's the polite way of saying it."

That said, Forester Value has had only one down year. In 2007 it lost 5%, largely because the fund was heavily invested in financial stocks. By early 2008, Forester had pared the fund's allocation to financials from the usual 20% to about 5%. But seeing lots of value in the beaten-down sector, Forester has been adding financial stocks lately.

In running the $10-million fund, Forester looks for large, solid companies selling at bargain prices. He looks for stocks that are priced cheaply in relation to earnings, book value (assets minus liabilities), sales and cash flow. Among the stocks helping boost results this year are Anheuser-Busch (BUD), which has agreed to be acquired by Belgium-based InBev, EOG Resources (EOG) and Wal-Mart Stores (WMT).

Although Forester typically holds a stock for about two years, he recently held shares of Bank of America (BAC) for all of a week and a half. Forester pounced in mid July when BofA shares, which he had owned previously, hit $18 -- two-thirds off their 52-week high. After the bank issued an awful earnings report that nonetheless topped analyst expectations, the shares ran up to $33 and Forester sold. "You don't know when it's going to run like that," says Forester. "But when you get almost a double, it's probably time to lighten up." The stock closed at $32.90 on July 31.


Forester also recently picked up shares of UnitedHealth (UNH). The managed-care company could be hurt by efforts to rein in Medicare costs, and reforms could hurt its revenues and profit margins, Forester acknowledges. But he believes the stock price, which closed at $28.08 July 31, already reflects the Medicare risks. UnitedHealth is "still a good company that will do quite well for the rest of the year and beyond," he says.

Thanks to its strong performance in 2008, Forester Value is now competitive with the S&P 500 over the past five years. During that period, the fund returned an annualized 6.2%, lagging the index by an average of 0.8 percentage point per year. But we're bothered by the fund's lack of consistency and would like to see a few years of average-to-above-average results before we'd feel comfortable recommending it. The fund charges 1.35% in annual expenses and requires a minimum initial investment of $2,500.