This month, we screen for attractive “bond replacement” investment candidates using large holdings of the Sound Shore Fund (SSHFX), a $1.9 billion NAV mutual fund managed by 31-year veteran, Harry Burn.

We have selected the stocks that Burn reported purchasing in the fourth quarter of 2016 (the latest period for which data was available) and have limited the list based on two criteria:

  • The top 10 stocks that represented more than 2% of the portfolio’s value
  • Stocks listed had been bought by the fund in the reported quarter

These conditions were to screen for the stocks in which the manager had demonstrated the most confidence (by portfolio weight) and about which they had made an active decision to invest. As we explain in our video introduction to “Bond Replacement” investments, we are using these portfolio managers’ actions as an indication of undervaluation.

You might be worried that the data is stale, since the positions were updated two months ago, but looking through the ten ideas, I see that the Effective Buy Price for five of the option strategies are lower than the price at which Burn reported buying. Four more are within 10% of Burn’s buy price, and only one, Allergan (AGN), has an EBP that is outside the 10% band (11.5%).

The second largest holding in this list is that of software giant Oracle (ORCL), about which we have done significant research. Three stocks, the largest holding on the list Occidental Petroleum (OXY), Perrigo (PRGO), and Allergan all appear to be new holdings for the firm.

The fund has been run by Burn for a very long time, and he is a well-respected manager who focuses on large- and mid-cap value firms. Looking through his 4Q2016 letter, he mentions that the fund’s weighted aggregate P/E ratio is 15.2 – much lower than that of the S&P 500 at present. While I am suspicious about using multiples to value a company, looking at the aggregate P/E ratio of baskets does make sense, and the fact that Burn’s fund’s aggregate is low is a positive in my opinion.

From looking at a long-term chart, it seems like the fund does especially well pulling out of temporary market drops. Clearly, this characteristic is an advantage for an investor interested in finding bond replacement ideas!

You can read the fund’s third quarter 2016 letter here and FundMojo’s review of the fund here.

Please reach out if you have any questions about this spreadsheet!