A longtime member of the Windsor (VWNDX) and value investing team at Wellington Management’s Radnor offices, James Mordy, 50, feels it’s his job, and that of his team, to “turn around” the performance of the fund. My sense, speaking with him is that after more than two decades of being a member of the team, he’s energized to be the trigger-pulling portfolio manager. As always, the buck stops with the portfolio manager, and with the majority of Windsor’s $17 billion in assets under his control, Mordy knows what’s expected of him.

Dan Wiener:  Jim, you’ve been on the Windsor team for more than two decades. How’d that happen?

Jim Mordy: I joined here straight out of Wharton, spring of 1985. It was too good to pass up, so I’ve been here ever since. I was hired as an analyst. John Neff was a big believer in the concept of having teams of  analysts around the portfolios, and I think we’ve always had one of the deeper and stronger teams here at Wellington as a result of that legacy. He had me follow a number of companies and a variety of industries over the years.

DW: Anything in particular?

JM: For John I followed home builders, steel companies, electric utilities, a little bit of retail, and the rest of it was kind of all over the map. I did a number of the same things for Chuck [Freeman], and added some technology coverage along the way in the areas of PCs, hardware and semiconductors. I also added the waste management industry.

DW: How will running Windsor, versus being an analyst on Windsor, change the way you work?

JM: Starting in the beginning of 1997, I became a portfolio manager for our mid-cap value book of business, which was kind of brand new at the time. I’ve been running those portfolios for the last 11 years. As time has gone by, I’ve actually given up quite a bit of my analytical responsibility to the younger members of the team.

DW: You’re also a listed advisor to the Hartford Value Opportunities fund and solo manager on Hartford’s MidCap Value fund. Are you in fact a mid-cap expert, a large-company expert, or just a value guy who fishes everywhere?

JM: I would say the latter—I’m a value guy. Although, clearly in recent years, my main focus has been in the mid-cap space.

DW: And how will that change?

JM: Well, I’m getting up to speed on a lot of the larger-cap holdings that we’ve owned in the Windsor fund and that we are adding to the Windsor fund, so that is a burden on me, and I’m lucky to be surrounded by a talented team here in Radnor, where each of the analysts has already been following those companies and has a deep understanding and appreciation of those companies. I’m certainly leveraging that expertise as well as the tremendous amount of expertise that we have in Wellington generally, in regard to all of these stocks.

DW: What’s your investment style, and how is it either similar to or different from John’s or Chuck’s or Dave Fassnacht’s style?

JM: My style is really a continuation of…</> the style that we have run the Windsor fund with over the years. I don’t really think a lot will change. It’s opportunistic; it’s contrarian; it’s very bottom-up, focused on fundamental research. And what I mean by “contrarian” is that we look for companies that are either out of favor or misunderstood for some reason.

My style would be to question the conventional wisdom around a stock—but once we formulate a thesis, to constantly challenge ourselves to make sure that we are, in fact, right. There is a thin line between being a contrarian and being stubborn.

My job as a portfolio manager is to continuously challenge the analysts and make sure that our views still make sense and are logical. I learned that, probably most importantly, from John. He was just a tremendous logical thinker, and you could see that in everything he did—just asking if what he was hearing or what he was seeing made sense.

I try to be a very good listener. I think that’s one of my strong points. I’m surrounded by an awful lot of smart, talented folks here at Wellington, and I need to listen to what those folks have to say. Finally, I would say I try to infuse the team with a strong sense of responsibility. That’s something that has evolved over the years to a much greater degree than in my early days with John. Each of the analysts
on the team here have responsibility for their stocks, and I depend on them to come up with new ideas for the fund to the same degree as I come up with new ideas for the fund.

DW: What do you mean when you talk about the evolution of infusing the analysts with greater responsibility?

JM: I’m really saying that there’s a dialogue; it’s continuous; it’s fairly deep; I depend on them to come up with a view on the stock, with earnings estimates, with what they think of as a target price. I can certainly debate that. I really hold them responsible for what’s happening with the stocks that they cover in the fund.

DW: So John was a bit more autocratic in the way he ran Windsor?

JM: That’s probably fair.

DW: You mentioned being contrarian and opportunistic. Are you an “I want a dollar’s worth of assets for 50 cents” kind of guy? I refer often to what Windsor does as deep value.

JM: I can tell you some of the things I look for in stocks. I’m not sure I would say that we are “deep value,” because that has its own connotation of buying things that are not working or on death’s door, perhaps. I do key off p-e quite a bit, though it’s not the only metric I use. I look for stocks that sell at forward p-e’s that are below their total return—total return being a combination of a five-year earnings growth rate and a dividend yield. I like to look for a credible management team, a company that is in a solid competitive position, or at least one that is improving, not deteriorating.

DW: Does that mean one of the top companies in its business?

JM: Yeah, sure. It wouldn’t have to be number one, but how about a number three that’s improving its position and moving up to number two?

Then, certainly, we can’t forget the balance sheet, and any company that has a strong free cash flow is something that we might look for, too. You won’t always find every one of these with every stock, but that gives you a sense. So rather than deep value correlating to big ugly companies, I think I’m looking for companies with reasonable or average growth prospects that sell at a significant discount in terms of valuation relative to the marketplace as a whole.

Our portfolio growth rate is slightly, very slightly in excess of the market, but we sell at a p-e that’s a little less than the market p-e. That’s the kind of math I like to see in the portfolio.

DW: How do you avoid value traps, something that I believe contributed to long periods of under-performance for Windsor and Capital Value (VCVLX)?

JM: It kind of goes back to what I said about being contrarian but not being stubborn and always challenging yourself to make sure your thesis is right. I have something I call a reality check. When the fundamentals change on a stock, you get a change in earnings guidance; maybe the earnings come down 10%, and the stock opens down 10%, so it’s still selling at the same p-e that it was—well, what do you do?  Whenever I buy a stock, I try to identify the three main reasons why I like it, and if any of those three reasons are no longer true, then it’s probably a big red flag. If the three reasons why you first liked it are still valid, then it’s probably an opportunity to add to your position at a discounted valuation.

DW: How much focus do you have in foreign companies?

JM: They have been an important part of the portfolio. In general, we have always been interested in non-U.S. companies with the same or better fundamentals but at a better price. We have typically concentrated in more commodity-like industries, where we have a firm understanding of the commodity and the fundamentals behind the stock. We may be a little less likely to buy a foreign utility that is subject to foreign regulation that we don’t have a deep understanding of. So that has typically been the pattern.

Our foreign holdings right now are about 20% of the portfolio.

DW: Would you ever take a large slug of the portfolio, like John Neff did, and go to cash?

JM: No. Beginning with Chuck, we decided that we should not do that. At the maximum, I won’t let our cash position grow beyond 5%. It’s our responsibility to have the shareholders exposed to equities, since they are invested in an equity mutual fund.

DW: More specifically, is there anything that looks particularly attractive right now, or anything that doesn’t look attractive?

JM: As far as things we like, we do have an overweight in healthcare, which is a bit contrarian. Pharmaceutical stocks would have been considered growth stocks years ago, but they have fallen into disfavor and are very cheap by our measures, so we like that group.

DW: They have nice yields too.

JM: That’s right. HMOs are another group that has been out of favor in healthcare that we’ve added to. We remain underweight in energy—it’s certainly been a headwind for us in recent years, but here we are with crude down $25 from the peak, and I would say I’m nibbling at some energy stocks on days when they are under pressure.

I have been a net buyer within industrials, energy, consumer staples, materials, and financials to a lesser degree, and a net seller in healthcare, technology and consumer discretionary.

DW: Who’s best-suited for Windsor, or turning it around, whom is Windsor best-suited for?

JM: I’ve always thought investors should own a number of different funds just to provide diversity. Windsor is not going to be a fund that will always be in sync with the rest of the market, particularly not with the momentum and growth funds, so to a person who perhaps owns some of those funds, Windsor would provide a nice balance for them. We will be a portfolio of companies that have reasonable growth prospects and sell at a significant discount to their valuation. Over the long term, this should provide a return that’s in excess of the overall market.

DW: Excellent. Thanks, Jim

 

Dan Wiener is editor of the Independent Adviser for Vangaurd Investors, part of the InvestorPlace Media family of publications. To read more investing insights from Dan and the rest of experts at InvestorPlace, please visit us at www.InvestorPlace.com.