How This Fund Manager’s Shift in Focus from Economics Led to Remarkable Stock Market Outperformance
In the world of finance, success is often measured by the ability to outperform the market. For years, the GoodHaven Fund struggled to achieve this feat, but a change in strategy has led to remarkable outperformance since the end of 2019. Larry Pitkowsky, managing partner of GoodHaven Capital Management, recently sat down with MarketWatch to discuss the fund’s transformation and the key factors behind its success.
The GoodHaven Fund, which follows a concentrated-value approach, had been a long-term underperformer for five years through 2019. During this period, it returned only 9.4%, while the S&P 500 surged ahead with a return of 73.9%. However, late in 2019, Pitkowsky implemented a series of changes that shifted the fund’s investment-selection process. The fund began paying less attention to macroeconomic factors and instead focused on holding successful companies for longer periods to avoid selling too early.
One example Pitkowsky highlighted was Microsoft Corp. (MSFT), a stock the fund had parted ways with too early. He emphasized the importance of owning high return-on-capital companies with strong growth trajectories before they become popular among investors. By avoiding structurally challenged businesses that may appear cheap but lack growth potential, the fund aimed to capitalize on undervalued opportunities.
The results of these changes were evident when comparing the fund’s performance against the S&P 500 since the end of 2019. The GoodHaven Fund has consistently outperformed the market, showcasing its ability to navigate the stock market’s ups and downs. This smooth ride has led to a much higher three-year return for the fund compared to the S&P 500.
Examining the fund’s portfolio, it becomes clear that Pitkowsky’s strategy focuses on owning companies with strong growth potential and low levels of debt. The top 10 stockholdings of the GoodHaven Fund include well-known names such as Berkshire Hathaway Inc., Alphabet Inc., and Bank of America Corp. Each holding represents a significant percentage of the fund’s portfolio and is carefully selected based on its potential for growth and valuation.
Pitkowsky highlighted two “big wins” for the fund: Builders FirstSource Inc. and Lennar Corp. Class B shares. Both companies operate in the homebuilding industry and are trading at attractive price-to-earnings (P/E) ratios. Pitkowsky believes these companies have plenty of growth ahead of them and appreciates their low levels of debt.
Bank of America Corp. has also been a standout performer for the fund. Pitkowsky considers it his largest purchase during a 12-month period, citing its favorable risk/reward potential and recurring earnings from nonbanking businesses. Despite a depressed return on equity, Bank of America’s valuation appears attractive compared to its historical averages.
While the fund had its regrets, such as selling Microsoft shares too early, it has held onto Alphabet Inc. since 2011. Pitkowsky remains comfortable with Alphabet as a large holding, noting its focus on cost re-engineering and attractive valuation compared to its growth potential.
The success of the GoodHaven Fund can be attributed to Pitkowsky’s shift in focus from macroeconomic factors to company-specific analysis. By identifying undervalued companies with strong growth potential and holding onto them for longer periods, the fund has been able to outperform the market consistently.
Investors looking for a fund that prioritizes value investing and long-term performance may find the GoodHaven Fund an attractive option. With its recent transformation and remarkable stock market outperformance, it has proven its ability to deliver results in an ever-changing market landscape.
