Morningstar - Q3 2020 - 65

Medical equipment suppliers can carve out niches
that grant them competitive advantages.
Becton, Dickinson BDX enjoys the advantage of
scale, switching costs, and a large installed
base, says Hillman, in areas such as medical
supplies and diagnostic products.
Long-Term Perspective

Hillman is willing to settle in with his carefully
selected picks. Some value investors want
to identify a catalyst for future appreciation, but
Hillman believes such catalysts are unpredictable.
He buys knowing he might hold a stock
for five months-as has happened upon news
of a merger-or five years.
Microsoft MSFT exemplifies what Hillman
looks for in a company. The dominance of
Windows and the Microsoft Office suite creates
barriers to entry for competitors and high
switching costs to customers. The shift to
subscription-based cloud services will smooth the
company's revenue stream and enhance its
already impressive financial flexibility.
The fund's top holding at the end of May
was Amazon.com AMZN, in the portfolio since
2014. "We bought the company in 2014,
and we thought it was deeply undervalued. We've
had plenty of opportunities to trim the
position back since then, but we continue
to think there's value in it."

However, the fund's stakes in Amazon and
Microsoft, as well as a position in Facebook FB,
were notable exceptions, and its 13% loss
for the first half put it in the top third of the
large-value category.
While those particular names aren't typical value
picks, the fund's overall portfolio profile is
that of a value strategy, with price multiples in line
with the category average. Its streamlined
portfolio and performance are what set it apart.
This year's strong relative performance follows
a top-percentile 35.6% return in 2019's rally,
and a top-decile showing in 2018's down market.
The fund isn't always at the top over the
shorter-term periods, but it has been consistently
strong over longer time periods. From 2000
through June, its three-year rolling returns land in
the top quartile of the large-value category
50% of the time and beat both the category and
the Russell 1000 Value 60% of time.

something like this happens, people think
the world will never be the same. But people are
inventive and industrious. Things will get back
to normal."
He has found spending more time at home
during the crisis "surprisingly fun. When you sail
a lot, you tend to miss out on mainstream
culture. Now, we are rewatching old movies and
checking out series like Black Mirror and
The Last Dance."
He and Quizon enjoyed having their college-age
child home for a while-Marley is another
Tufts student and a former member of the sailing
team who today devotes time to social justice
causes. And now the hardworking spouses
"actually get to see each other during the day. I like
to unwind by creatively preparing meals,
and Melba likes to unwind by enjoying the meals
that I cook. The deal is that she has to give
me honest feedback, so I can improve my culinary
skills. There's no sugarcoating."

The Virtues of Patience

Hillman doesn't aim to moderate risk, per se-
and the fund's Morningstar risk scores
and standard deviation are in line with the
category norms. "We are driven to beat
the benchmark. We want to crush it," he says.
"We can't do it over every single time
period, but over economic cycles following our
discipline should make that happen."

The picks tend to be large cap, with the average
market cap in the qualified investment
universe exceeding $100 billion. "If a company has
competitive advantages, it will grow to
the size of its addressable market," Hillman says.

The constancy of his investors has contributed
to this success. Hillman hasn't had to contend
with outflows at inopportune times; he has
the allegiance of advisors who've worked with him
for years.

Not all the holdings are household-name
behemoths, though. Earlier this year, Hillman
added Plains All American Pipeline PAA,
which has a market cap around $7 billion. He says
the company has a solid position in the areas
it services, and it provides storage as well, and
storage prices have been inflated.

The new investors who flocked to the mutual
fund in last year's rally also proved to have staying
power when the going got rough this year.
Because flows are a potential hindrance with
a mutual fund structure, Hillman may use options
to manage them, as well as to help rebalance
the portfolio and enhance returns.

Even after a second-quarter rebound, few
of the fund's holdings were in the black for the
year to date through June 30, and Plains All
American Pipeline had among the steepest losses.

Hillman has been in the business through
his share of downturns, from the 1987 crash
through the financial crisis, and he sees
the COVID-19 crash in the same light: "Every time

Meanwhile, Hillman remains as vested as ever in
value investing, even as growth stocks have
increased their yearslong lead during the current
crisis: "History teaches us that category
rotations do occur, and trying to time them
is a fool's errand. People need to be in
value stocks before the rotation comes, not after.
We believe there are currently deep values
in the value space and the market is going to need
to exploit them to restore equilibrium." K
Laura Lallos is managing editor of Morningstar magazine.

morningstar.com/lp/magazine

65
http://www.Amazon.com http://www.morningstar.com/lp/magazine
Morningstar - Q3 2020

Table of Contents for the Digital Edition of Morningstar - Q3 2020
