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Deep Value Surprises
American Express Diversified Equity Income Fund
Interview with: Warren Spitz

Author: Alexander Vantchev
Last Update: , :
Despite the market’s run-up in 2003, Warren Spitz believes there are still opportunities to find value, and even “deep value” opportunities. Since he took over American Express’ Diversified Equity Income portfolio three years ago, the fund has remained in Lipper’s top quintile in the Equity Income category for the year-to-date, 1-year, and 3-year periods.

American Express Diversified Equity Income Fund

Q: Do you have some restriction on the number of holdings in your portfolio?

A: No, but as a practical matter, we won’t exceed 100 by very much.

Q: When do you trim and sell a position?

A: Partly, we do it on a basis of valuation. If we buy a stock at 12 times earnings because we think it should be 15 times, as it approaches 14 or 14.5, we are going to start letting that position go. For the most part we are inclined to take profits, but that would be a hard decision in an area which would be a tactical purchase, like, again, telecommunications service stocks. We are not anticipating that we are going to be holding those for the next 50% gain. On the other hand, with Caterpillar, over a number of years, we might be looking for more than 50%.

Q: What exactly do you see then in telecom stocks – a price or a catalyst?

A: We belong to the group of investors that doesn’t worry too much about catalysts. If a stock is cheap enough, sometimes the price is the catalyst. You had a dividend yield approaching 5% on some of these regional Bells, trading at less than 10 times free cash flow and that was virtually cheaper than any other segment in the market. So if you are really sure as some people seem to be that these businesses are going to evaporate in the next two or three years, then you wouldn’t do that. I am not inclined to make that bet, so I think it is a reasonable place to be with a high dividend yield in the context of a market that has already run up 20%.

Q: Why don’t you go for the dividend yield on REITs?

A: We are looking at areas that are contrarian in some fashion, and REITs don’t quite fit the bill right now. They have been doing quite well for the past two or three years. It is not contrarian, because it has become a favorite way to stay in a market that scares a lot of people. I actually think REITs are reasonable places to be, but there is no denying that they have been one of the best-performing areas in the market over the last three years. Unless you are really, really certain that there is a long-term future that favors this area, you have to think about reducing the weighting and that is what we have done.

It is not that I am drawn toward more volatile stocks. I am just trying to build a portfolio of opportunities that can surprise people on the upside. In certain markets, a number of years ago, we had more REITs. But the REITs have moved up, and we really like to look in areas where the expectations are lowered in some fashion. When the expectations are low, it is relatively easy to beat them and stocks will do well.

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