Forester: More than Meets the Eye in Housing

Fund manager Tom Forester, who was the only equity fund manager to make money in 2008 when the housing and financial crises rocked markets, says issues still lurk beneath the surface of the rebounding housing market.

While foreclosures and delinquencies have declined quite a bit, Forester tells Investor’s Business Daily that many foreclosed homes have been bought in recent years by hedge funds or wealthy investors, who wanted to rent out the properties to make money. But an oversupply of rental properties is curtailing their efforts. “Many hedge funds paid full price and more, leading to a price spurt,” Forester said. “Many of the early funds are getting out.”

Forester also says many home loans that have been reworked to create lower monthly payments are in trouble. “Most of those loans are likely to default within three years,” he said. And he says that rising interest rates have led to slowing refinancing activity, hurting lenders.

One lender that Forester does own: U.S. Bancorp. “We own (USB) because they have a strong balance sheet and good underwriting,” he said. “Loans in their portfolio don’t have credit problems. But their mortgage component is a (potential) head wind for them.”

Forester appears to have his Forester Value fund portfolio very defensively positioned, with healthcare and consumer staples being his two largest sector holdings at the end of the third quarter and about 25% of his portfolio in cash.

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Forester Worried Tapering Will Lead To Sell-Off

Tom Forester, whose fund was the lone equity mutual fund not to lose money in 2008, says the unwinding of the Federal Reserve’s quantitative easing policies could be a catalyst for a stock market downturn. Forester tells 4-traders.com that the Fed’s asset-purchasing plans have had unintended consequences, “one of these being that you’ve got kind of the stock market is bubbling, if you will. I won’t say it’s in a bubble but it’s going that direction without the fundamentals of the economy picking up and providing a strong foundation for it.” He also talks about why he thinks the housing market recovery — a big recent stock market driver — is being driven by short-term factors that won’t last. He has a significant portion of his portfolio in cash (23% at the end of the second quarter, according to Morningstar).

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Forester Cautious and Defensive

Fund manager Tom Forester released his third quarter commentary earlier this month, and his message was one of caution.

“As risks have increased, we have increased our protection,” Forester wrote. “If risks subside or are priced in, we will gladly reduce our protection. But until the market more fully reflects these risks, we will remain cautious.” According to Forester Value’s site, the Forester Value Fund had 23.5% of its portfolio in cash as of the end of the third quarter. Consumer staples (20.2%) and healthcare (14.3%) were its biggest sector holdings.

Forester expressed concern that the Federal Reserve’s quantitative easing plans have not been helping much with job growth, and that the “wealth effect” championed by the Fed has also had a limited impact. He’s also concerned about inflation.

Forester, writing before the recent spate of weak earnings reports, was also concerned about corporate profits. “We think that it will be difficult to grow revenue and that the easy cost cuts have already been made,” he said. “So we see earnings headwinds. For global companies though, a depreciating US Dollar makes foreign earnings worth more. Is that why the Fed announced an open-ended money printing program?”

Top International Managers Staying Defensive

Two international mutual fund managers with stellar long-term track records, Tom Forester and Robert Wyckoff Jr., have been continuing to beat the market recently using defensive approaches. 

Forester has outperformed other funds in his category recently by sticking with several consumer staples stocks, including spirit-maker Diageo, according to The New York Times. Wyckoff’s fund, meanwhile, has been helped by defensive stocks like British American Tobacco, Diageo, Heineken, Roche, and Novartis.

Both Forester and Wyckoff are underweighting financials, with neither owning any eurozone banks, the Times reports. Forester also has a good portion — 40% — of his Forester Discovery Fund in cash, saying he was “very concerned about the uncertainties in the world.” He likes dollars more than euros right now, explaining, “We could have held that cash in euros if we wanted, but we are choosing to hold that cash in dollars. Right now, we believe the dollar is a better holding than the euro.”

Forester Defensive But Still Finding Value

Tom Forester, who has a stellar long-term track record and headed the only long-oriented stock fund to post a positive return in 2008, is again playing defense. But that doesn’t mean he’s shunning stocks — Forester still has about 80% of his fund in stocks.

“If you just stay in money markets, you might miss out when the market goes down, but you also miss out when the market goes up,” Forester tells InvestmentNews. “And once people go into money market funds, they never get out. … There has been too much volatility recently in the markets but we haven’t gone anywhere.”

Forester also uses S&P 500 put options to hedge his 40-stock portfolio, according to InvestmentNews. And some of his largest holdings are defensive dividend-payers, like Chevron and Altria Group. “Even though we’re fundamental investors, we still pay attention to the macro picture, and we’re a bit cautious right now because a lot of the large-cap companies get 30% to 40% of their earnings from Europe,” Forester said. “We want to be overweight the more-stable sectors like consumer staples, health care and utilities.”

Forester Sees a Return to High Quality

Top value fund manager Tom Forester says the market has begun shifting away from junk-type stocks and back toward quality, and he thinks the end of the Federal Reserve’s quantitative easing program is part of why that trend will continue for several quarters.

“The pendulum is swinging back toward quality. Since early 2009, low quality (usually high beta) stocks have been on a tear relative to high quality stock,” Forester writes in his second-quarter update. “Some of this was aided by QE1 and QE2 and the zero interest rate policies of the Fed. … As QE2 ends, we will see if the S&P rocket has reached escape velocity or whether gravity will reassert itself. We fully expect that higher quality stocks (especially those with bargain valuations) will outperform for several quarters. It is no coincidence that we are positioned accordingly.” (Click here for a PDF copy of Forester’s letter.)

Among the positives Forester sees in the economy: Japanese manufacturing plants are coming back on line after the earthquake and tsunami; and the U.S. dollar could benefit from problems in Europe, which could help lower oil prices and give consumers more spending money.

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Forester Looks for Downside Protection

Top value investor Tom Forester, who was the lone equity fund manager to post positive returns in 2008, is worried about the U.S. and global economies and is thus keying on high-quality stocks that can weather tough times.

“The U.S. is running out of room to run deficits or print money,” Forester said at the Morningstar Investment Conference, according to MarketWatch. “We’re using up most of our bullets and we don’t know how it will play out, so that means you have to go towards high-quality names to have some potential for upside if things work, and to protect the downside if things get worse.”

Forester, who says he’s also concerned about how countries that hold a lot of Greek debt will fare, says he’s keying on “high-dividend payers with a good balance sheet and a stable top line”, like AT&T and Pfizer. He’s also holding a decent amount of cash — about 20% of his Forester Value fund and 45% of his international-focused Discover fund are in cash, MarketWatch reports.