Value Investing Rewards The Prudent And Patient

There isn’t a shortage of mutual fund managers who consider themselves value players. Yet all take a back seat to Edwin Walczak - portfolio manager of Vontobel U.S. Value Fund and a strict disciple of value gurus Benjamin Graham and Warren Buffett.

Adherence to their tenets keeps Walczak entirely out of major categories of stocks, such as technology and cyclical issues, even when they’re dirt-cheap.

But his religious-like devotion to value investing - buying stocks at a discount, presumably because they’re temporarily depressed - has paid off with handsome returns, suggesting this fund makes sense for queasy investors.

“In the short run, the stock market is just a voting machine,” Walczak, 41, says. “But in the long run, true value will almost always rise to the surface, as long as you’re patient enough.”

Through May 11, Vontobel rose 17 percent, ranking No. 10 among 417 growth and income funds tracked by Lipper Analytical Services. For the five years ended May 11, it produced an average annual return of 12.2 percent, ranking just below the top 25 percent of growth and income funds.

The $40 million-asset fund is extremely concentrated. Vontobel (800-527-9500) has only 30 holdings, and two-thirds of its assets are in financial services stocks. The two biggest issues - the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., both makers of secondary markets for home loans - constitute 20 percent of his portfolio.

Walczak follows several key criteria. He invests; he does not speculate. That means his stocks typically keep their principal intact while paying a satisfactory return. He avoids sectors he does not understand, like high technology and biotechnology stocks.

He targets good businesses with predictable earnings. These companies are expensive to create, have owner-oriented management and boast good returns on equity.

Walczak’s investment strategy isn’t foolproof. He was burned by banks stocks in 1990, for example.

But generally, mutual fund experts like what they see. “Ed Walczak doesn’t just look at the financial numbers,” says Matthew Muehlbauer, an analyst at Value Line Mutual Fund Survey. “He wants to fully understand his companies and make sure that management is competent. That kind of research is crucial.”