Oak Value Fund: Angling for Returns

AVID FISHERMAN LARRY COATS DOESN'T CAST A very wide net. rather, he studies where he thinks the best fish are biting. And he waits.

"It's more important to choose the right stream, to go to where you'll find the types of fish you want," says Coats, co-manager of the $68 million Oak Value Fund (OAKVX), based in Chapel Hill, N.C.

The same holds for his investing approach. Coats and co-managers David Carr and Christy Phillips took the typical value-investing approach -- screening the universe of companies with valuation tools and winnowing down from there -- and turned it upside down. "We took the sieve that traditional value investors use, and we inverted it," he explains, by starting with the companies that they'd like to own, and then going "through the process of what they're worth and what they'd need to be trading at to have an appropriate margin of safety."

Sound time-consuming? It is, and it requires a fisherman's patience. Coats, Carr and Phillips devoted a good chunk of 2004 and 2005 to evaluating thousands of companies to find what they call the "investable universe," building on years already spent studying and visiting these operations. After that process, "we already know primarily what we'd like to own," says Phillips.

The strategy has paid off. Oak Value is up 19% this year, more than four percentage points higher than its peer group of large blend funds, according to Morningstar. It's in the top 5% on both a one- and three-year basis. "They are really focusing on companies, rather than having their first impression be the valuation or price," says Gregg Wolper, an analyst at Morningstar, which gives the fund a four-star rating.

The strategy can mean doing catch-and-release multiple times with one stock, as has been the case with the for-profit education giant Apollo Group (APOL), which they've bought three times. It can also mean waiting many years for the opportunity to catch a coveted stock, as was recently the case with Monsanto (MON). "In some ways [Apollo's] countercyclical," Coats explains. "As people go through transition periods in their professional lives, they want to improve their opportunities." Enrollment pushed past 420,000 in the company's third quarter, a 22.5% gain from the previous year, boosting the company's revenue 26%. The stock trades at about $64, up from 58 when Coats bought it in May.

Avon Products (AVP) is another stock that Oak Value has held many times in the past 15 years, and has recently gone from being a smaller holding to a top five. "Historically, it has been valued for its distribution model, but they've also been recognized as developing a brand," co-manager Phillips says. Avon, at $32.32, is up more than 34% this year. Oak Value added shares last October at around $21.

A newcomer to the fund this year is agribusiness giant Monsanto. The company is by no means new to Oak Value. Coats & Co. have wanted to add the stock for years, but it was expensive. They were impressed with Monsanto's weed-killer Roundup, but what they really liked was the company's seed business. They previously had concluded that Monsanto's earnings were being skewed by one-time price increases for Roundup that weren't likely to be duplicated.