This month, we screen for attractive “bond replacement” investment candidates using new holdings of two different funds:

  1. Jensen Quality Growth Fund: $5.2 billion AUM, managed by Robert Zagunis. Morningstar Report on JENSX
  2. FPA Capital Fund: $543 million AUM, managed by Robert Rodriguez. Morningstar Report on FFPTX

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

  • Stocks listed represented more than 1% of the respective portfolio’s value
  • Stocks listed had been bought by the respective fund in the reported quarter

These conditions were to screen for the stocks in which the managers 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.

Looking through the third quarter data, it seemed like many portfolio managers were selling more than they were buying, so finding portfolios with 10 new or increased positions was difficult (we shoot for 8-10 new investments per month for this feature). After some thought, we decided to feature two portfolios.

Reading through FPA Capital’s third quarter investor letter, we liked their approach to stock picking and especially thought their comments regarding the option value of cash (something we discuss in the IOI 103 class) were smart. Frankly, we thought less of the commentary to the Jensen fund, but thought that the stocks they were buying looked sensible. The thing that we like about both managers is that the funds’ respective position sizes are relatively large (3%-6%), which suggests to us that they are focused on picking good stocks rather than on receiving management fees for closet indexing.

Another thing we noticed is that the Effective Buy Prices for many of the stocks on the list will be below the managers’ reported buy prices in the last quarter. Alphabet (GOOGL) has a high per-share stock price, meaning that one should be careful not to inadvertently overweight one’s bond replacement portfolio to that one stock. Several other $100 / share and above stocks are also on the list, so think carefully about portfolio weightings for these.

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