Merrill holds the hot ticket

Roxane McMeeken explains how two funds from Merrill Lynch have maintained their ‘must-have’ status. Two Merrill Lynch, dollar-denominated, US value funds are proving to be regular favourites in the model portfolios built by our panel of fund selection experts. The ML US Small Cap Value Fund and the ML US Focused Value Fund were both outperformers in the past but have since slipped below par. The Focused fund in particular has slipped recently. Performance over five years is an impressive 60.7 per cent, against –11.63 per cent for the S&P 500 index, according to Standard & Poor’s. For the past year, however, S&P’s figures show the fund has lost 38.42 per cent, slipping behind the 33.81 per cent index loss. Yet the fund remains popular. Senior portfolio manager Bob Martorelli says: “Our recent difficulty in absolute terms is much more a product of our environment than anything else. The bubble that was created in the markets in the late 1990s has taken its toll over the recent past.” He admits, “in relative terms, our decision to position the portfolio with a more cyclical/recovery bias has hindered performance, but our sensitivity to price has provided a bit of a cushion where the fund has performed roughly in line with the overall US market over the past 12 months.” Bounce-back expected Mr Martorelli is confident that the fund will bounce back. “We believe that the businesses we own are trading at such discounts that investors will be rewarded when the markets recover and trade based on fundamentals rather than emotion.” The philosophy behind the US Focused Value Fund is “to purchase stocks at any market capitalisation where investors have oversold the shares due to short-term problems or shortsighted fears,” Mr Martorelli explains. He says: “Markets tend to trade at extremes, both positive and negative. As value investors, we seek to purchase shares in quality businesses, with quality management, that are trading at attractive prices due to temporary issues that investors perceive as long-term problems as reflected in stock price.” Stock by stock Stocks are initially screened for compelling valuations using a variety of measures. “Different sectors and industries may trade on different metrics,” Mr Martorelli says, “so we don’t use a one-size-fits-all approach to these metrics. We are looking for companies trading at deep discounts to the market and to peers, and from there we begin our detailed fundamental analysis on a stock-by-stock basis.” Contacting and meeting management, digging into company financial statements and balance sheets, “assessing the viewpoint of the street”, and estimating conservative earnings potential are all vital to the investment process. Stocks may be dropped from the fund for different reasons, reveals Mr Martorelli. “The best case scenario is when our viewpoint was accurate, and the stock’s price has risen to a level where it is no longer one of our top risk/reward candidates. We may also sell a stock from the portfolio if another stock becomes more attractive than our current holding, or if a stock we own has a fundamental issue that changes our view of its prospects.” The Focused fund is composed of 35 to 45 holdings and has considerable tilt towards technology of 25 per cent. Mr Martorelli says this is “not so much a decision that technology on the whole is due for a rebound, as it is that we have seen a preponderance of good businesses trading at ridiculouslylow valuations.”