Steady and Sure

Do bear markets favor value investors? While there’s no established research supporting that, Matthew Finn and Kurt Lauber, who manage Minneapolis-based Thrivent Financial for Lutherans’ $590 million large-capitalization value fund, have avoided the dramatic downturn that the broader market has taken, sending most indices solidly into bear market territory. The Finn-Lauber team has been able to outperform their benchmark indexes (before fees), helping investors avoid a significant proportion of the downdraft in domestic stocks. It’s worth noting that the sales charge on the fund does present a significant headwind vis-à-vis performance.

Where are you finding value these days?

Finn: We are bottom-up managers, so we build our portfolios company by company, one at a time. Our largest sector is technology. We’re finding value in technology right now.

Technology as a value pick seems somewhat counterintuitive, given those stocks’ current role as a high-growth sector of our economy.

Lauber: Some technology stocks are attractive on a valuation basis currently. Many investors are looking back at the last cycle, in 2001–2002, when tech got killed, and they’re assuming that in this cycle the sector is going to get creamed. However, when you look at the operating side of technology and at information technology [IT] spending as a percentage of capital spending, we [didn’t get] extended like we did in the last cycle.

That has given us an opportunity with some quality companies like IBM Corporation [NYSE: IBM], which has a high return on capital, a strong mainframe cycle coming up, good products, and excellent IT service. A couple years ago, everyone hated IBM; the stock is up about 50 percent since we bought it.

About 20 percent of your portfolio is invested in financial stocks, which have been leading the market down. How do you choose comp-anies in this sector?

Finn: When we hit the second subprime hiccup in July 2007, we bought Hudson City Bancorp, Inc. [NYSE: HCBK], a savings and loan [firm] that gets most of its deposits from wholesale funding, making the company’s earnings sensitive to changes in short-term interest rates. They mostly loan money for jumbo mortgages, but when they loan money, they [usually] get paid back. They require a substantial amount of money down, so the loan-to-value ratios on their mortgages is in the 65 to 70 percent area.

When the yield curve was flat, which depresses the net interest margin—or spread—that a bank can earn on lending versus their cost of deposits, Hudson City decided to hold onto its capital, boosting tangible equity versus tangible assets. Hudson has gone up about 50 percent during the past year.