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Value fund with tax-light gains
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October 30, 2000: 9:49 a.m. ET
Fund manager Michael Mach likes IBM, Valspar, JP Morgan, SBC
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NEW YORK (CNNfn) - As you review the yearly returns for funds in your non-retirement account, no matter how they performed you may be slapped with taxes for capital gains incurred during the year, which can shave down your return.
You'll also notice that if you have a growth-oriented fund, the days of swimming in the black are over. The tide appears, at least for now, to be turning in favor of value investing.
Michael Mach has been navigating the new waters successfully while minimizing the tax bite for investors. Mach runs Eaton Vance's nearly year-old Tax-Managed Value Fund, which has racked up an after-tax gain of 13.2 percent year to date through Oct. 26, soundly outperforming the pre-tax gains of the average multi-cap value fund and the average growth fund during the same period, according to data from Lipper and Morningstar.
Mach answered the following questions from CNNfn.com about his fund and offered some of his favorite value picks:
Year to date, Eaton Vance Tax-Managed Value Fund has outperformed its peers. What are the biggest factors that have helped that performance?
I'd highlight three factors. First, I think we have done a better-than-average job of limiting our losses. One reason for this is our tax-managed philosophy, which causes us to harvest our losses by recognizing our mistakes and selling early. By doing this, we keep our disappointments from becoming disasters. Also limiting our losses is what I refer to as our commitment to "truth in labeling." As a value manager we only buy stocks that trade at discount valuations to the S&P 500. Adherence to this value discipline has kept us from owning any high P/E (price-to-earnings) stocks, many of which have experienced sharp corrections in 2000.
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 TOP 5 HOLDINGS AS OF 10/18/00
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SBC Communications
Safeway
Kimberley-Clark
JP Morgan
Duke Energy
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A second factor driving our performance has been our sector weightings. Again our commitment to "truth in labeling" has been beneficial, as it has resulted in our weighting the Fund to favor value sectors of the market including utility, financial and energy sectors. As the market's leadership has shifted towards these value sectors, our investments in them have benefited our shareholders.
Finally, I believe that our strong recent returns have been driven by our individual security selections. Eaton Vance's commitment to fundamental stock analysis gives us the confidence needed to step in and buy shares of above-average companies when they become available at discount valuations.
Recent market volatility has created many such opportunities, and we have capitalized on them by building low-cost positions in companies like Abbott Labs (ABT: Research, Estimates), SBC Communications (SBC: Research, Estimates) and TJX Co. Inc. (TJX: Research, Estimates).
What do you look for before buying a stock and would you, as some non-traditional value managers do, ever consider investing in a growth stock?
Our philosophy is to invest in companies with strong business franchises, attractive long-term-growth prospects and stocks selling at discount valuations relative to the S&P 500. We believe that companies with leadership market positions enjoy greater competitive stability than either mid-tier competitors or new-market entrants. By focusing our investments in market leaders like Anheuser Busch (BUD: Research, Estimates), Kimberly Clark (KMB: Research, Estimates) and MetLife (MET: Research, Estimates) we believe we limit the business risk commonly associated with equity investing.
Market-leading brands also provide solid platforms for future growth. Our philosophy is to seek out companies with double-digit earnings growth potential, as we see earnings growth as a key driver to future stock price appreciation.
We are committed to buying stocks that sell at discount valuations. We believe that buying stocks with lower multiples limits valuation risk. It also increases the potential for multiples to move up toward the market's average multiple, thereby providing another source of share-price appreciation.
 Has the market's decline in recent months, and steep drops on occasion, made your job easier or more difficult?
The market's increased volatility has created numerous investment opportunities for us. By knowing the underlying investment fundamentals of
companies and by having well-reasoned estimates of their intrinsic values, we've been able to use the market's volatility to buy stocks on weakness and sell them on strength. SCI Systems (SCI: Research, Estimates) is an example of a stock we have been able to buy in the 30s and sell in the 50s twice this year.
Please give three examples of stocks once held in your top 10 that you sold or reduced your position in, and explain why.
McGraw-Hill (MHP: Research, Estimates) and Schering-Plough (SGP: Research, Estimates) are both stocks that were once top 10 holdings. While we have not been sellers of these stocks, we stopped buying them as their prices appreciated. As the Fund's assets have continued to grow, these stocks have dropped out of our top 10 holdings. Nabisco Brands (NA: Research, Estimates) was a top holding earlier this year. We stopped buying shares and then exited the stock, following the announcements that Nabisco Brands was to be acquired by Phillip Morris (MO: Research, Estimates).
What, in your opinion, are the three top-value buys today?
At the end of September, our top two holdings were SBC Communications and JP Morgan (JPM: Research, Estimates). These companies both have strong market franchises, double-digit earnings growth potential and shares that sell well below the valuation metrics of the S&P 500. Among small-cap issues, a stock we like a lot is Valspar Corp. Valspar (VAL: Research, Estimates) has a very shareholder-oriented management. Its stock has been under pressure over the last few months. Despite recent acquisitions that we believe will strengthen the company's franchise and will provide its proven management team with new earnings-growth opportunities, Valspar's shares have sold off significantly in the last few weeks. We now believe they offer patient investors a compelling value opportunity.
What technology stocks look attractive to you right now?
We have been taking advantage of market weakness in the tech sector to build positions in companies that benefit from electronic OEMs [original equipment manufacturers] outsourcing more of their manufacturing needs to outside service providers. We believe that buying stocks in these Electronic Manufacturing Service companies (EMS companies) provides investors with diversified exposure to the growth of technology. What we find particularly appealing is that this diversified exposure comes at sharply discounted valuations versus the typical electronic OEM. Viasystems (VG: Research, Estimates), Pemstar (PMTR: Research, Estimates), Benchmark (BHE: Research, Estimates) and APW (APW: Research, Estimates) are four small stocks we own in this area. Among larger-cap tech stocks we believe long-term investors could be well served by buying IBM (IBM: Research, Estimates) and Lexmark (LXK: Research, Estimates) at these levels.
What in your view are some of the most promising sectors going into 2001?
The market's leadership has recently begun to swing away from technology and toward value-oriented segments of the market including electric utilities, energy and financials. Given the large valuation disparities that continue to characterize the market, we believe this trend could continue well into 2001. In addition, three cyclical areas of the market that have continued to be under pressure throughout 2000 and could rebound from very depressed valuation levels in 2001 are: 1) basic industries, where we have been continuing to accumulate shares of companies like Alcoa (AA: Research, Estimates), Dow Chemical (DOW: Research, Estimates) and Willamette (WLL: Research, Estimates); 2) retailers, where we like Haverty Furniture (HVT: Research, Estimates) and Lowe's Companies (LOW: Research, Estimates), and 3) automotive suppliers where stock like Delphi (DPH: Research, Estimates) and Tower Automotive (TWR: Research, Estimates) look appealing.
As a tax-conscious manager, what are your top strategies to control the year-end tax bite for your investors?
Throughout the year, we consistently implement strategies that delay the realization of gains, aggressively capture losses, and limit taxable dividend income. Following these strategies throughout the year has enabled the Eaton Vance Tax-Managed Value Fund to build a sizeable net realized loss position that will be available to offset future gains should we choose to take them.
Besides investing in a tax-managed fund, what can individual investors do to control the tax bill on their investments?
Iąd advise investors to go through their portfolios and take any available losses. We often fear that in taking a loss, we will be selling out at the bottom. One way to get over this fear is to put the proceeds from a loss-generating sale into a similar investment. For example, if an investor has suffered a loss in Georgia Pacific, selling GP shares and replacing them with a similar investment, say in Weyerhauser shares, will allow the investor to harvest a loss but to maintain a position in a leading forest-and-paper-products company. Going forward it is likely that if GP shares enjoy a bounce, Weyerhauser stock should move in tandem. 
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Eaton Vance
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