Morningstar Magazine - October/November 2017 - 66

Strategies

Contrarian and Concentrated
Poplar Forest Partners is promising
for risk-tolerant investors.

BEST IDEAS: MANAGER

Alec Lucas

This article is adapted from the fund's Morningstar
Global Fund Report dated July 14, 2017. Central to
this report is the Morningstar Analyst Rating, which
evaluates funds on five key pillars.
A deepened understanding of the approach of
Poplar Forest Partners IPFPX since its late 2007
separate-account origins suggests it has merit over
a full market cycle. Although extreme volatility
means patience is often required and lofty
fees detract, veteran manager J. Dale Harvey has
the skill to deliver long-term outperformance.
The fund's Morningstar Analyst Rating has been
upgraded to Bronze from Neutral.
Harvey builds a roughly 30-stock portfolio
using a contrarian and benchmark-agnostic
approach. Heightened volatility comes
from his proclivity to invest early in out-of-favor
stocks like top-10 holding Signet Jewelers
SIG. When Harvey first bought Signet in late
2016, concerns about its Zales acquisition,
customer financing, and the threat of Internet
retail had already cut its share price in half.
After disappointing sales and scandal, its stock fell
about a third more in 2017's first half. Harvey
remains committed, however, as he believes
its brick-and-mortar jewelry business will
survive and the firm's normalized earnings power
makes it a bargain.
Harvey won't get every call right, but his
background breeds confidence. Before founding
Poplar Forest Capital in 2007, Harvey spent
16 years working at Capital Group, contributing
initially as an analyst and beginning in mid-1996 as

Morningstar October/November 2017

trading at a roughly 33% discount to his intrinsic
value estimate over the shorter holding
period and a 50% discount over the longer one.
Harvey focuses on normalized free cash flow and
requires that 85% of the fund's assets are in
investment-grade, dividend-paying companies.
When betting on below-investment-grade
firms, he insists on a greater margin of safety and
only buys if his bear investment case does not
involve the permanent loss of capital.

a portfolio manager to strong offerings, including
American Funds Washington Mutual AWSHX.

Harvey and team craft a roughly 30-stock portfolio,
which they formally reassess every six months.
Full positions range from about 2% to 5%
of assets, with the smaller size used for riskier
investments. Because he's unlikely to pick
the bottom, Harvey builds positions in thirds and
aims to take advantage of share price drops
as he does. Since 2010, annual turnover has
ranged from 36% to 45%.

At Capital Group, Harvey's volatile style could
be muted by combining it with other approaches,
but here it is on full display. The fund finished
in the category's top 1% in 2013's rally and in the
top 3% in 2016, when value stocks came
back into favor, but lost more than most in 2011
and the 2015 -16 correction.
The fund has a competitive record since its
year-end 2009 inception, though, and the strategy
has a greater edge when evaluated from
the 2007 start of the separate account. Risktolerant investors should give it a look.
Process Pillar: Positive ∞
Harvey uses a contrarian, concentrated, and
benchmark-agnostic approach. Working as part of
a six-person investment team, he seeks midand large-cap stocks with the potential of at least
15% annualized returns over the next three to
five years. That means he's looking for businesses

Bottom-up stock-picking drives sector exposures,
which often deviate from those of the Russell
1000 Value Index. Between late 2010 and early 2014,
for example, the fund's 20% to 22% tech weighting
was around 15 percentage points more than
the index's. It included the legacy Hewlett-Packard,
which Harvey bought in 2011 when it was
overleveraged and reeling. After the firm split
in late 2015, he sold HP HPQ, the printer side of the
business with superior cash flow, and moved
the proceeds into less-favored HP Enterprise HPE.
If Harvey doesn't see value in a sector, he stays
away, as he's done with telecom and utilities.

Poplar Forest Partner's IPFPX
Growth of $10K 08/31/2017

Stats 08/31/2017

Morningstar US Large Val TR USD

12.25

14K
$

Morningstar Category

Large Value

Expense Ratio (%)

1.00

Fee Level

High

Morningstar Analyst Rating

3-Yr. Total Annual Return (%)

14.60

3-Yr. Total Rtn Ctgy % Rank

12
10.94
Poplar Forest
Partners Institutional

09/2014

09/2015

09/2016

Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017