In a market bedazzled by flashy growth stocks, Torray Investment Partners instead runs a fund that’s trying to redefine what value is. Value stocks — oftentimes slower growing companies with lower price-to-earnings or price-to-book ratios and usually higher dividend yields, typically concentrated in sectors such as consumer staples, household goods and financials — have long been trounced by growth stocks. So far this year, iShares Russell 1000 Growth ETF has added 9.1%, while rising 15.5% annually for the past decade, outrunning the iShares Russell Value ETF , which is up 3% year-to-date and 8.5% in each of the past 10 years. While the flagship Torray Fund has a value tilt, drawing its holdings nearly entirely from the Russell 1000 Value index, it has reoriented itself around what might be thought of as a new variant on value. The fund’s main strategy? Invest in slightly under-the-radar growth stories that offer smoother and consistent fundamentals, and stick with them for the long run. “Our view of value is that it is merely mispriced, misunderstood growth [disparities that only widen due to indexing],” Jeffrey Lent, partner and co-portfolio manager of the Torray Fund, said. The Torray Fund , founded by the late Robert Torray in 1990, is ahead 7.4% so far this year, outpacing the 6.5% gain in the S & P 500. Its concentrated portfolio of some 25 stocks, including Berkshire Hathaway , Eaton and American Express that have been held for years, ranks in the second percentile among such funds year to date and the 14th percentile in the past three years, Morningstar says. “There’s a lot of companies out there that are growing their business profitably that are under-owned … and that’s the stuff that you’re gonna find,” among Torray’s holdings, Lent said. “To me, that’s the new sort of definition of value. That’s what we’re aimed at, those companies that are still growing in profits or returns to shareholders, but they’re not trading at these breakneck speeds and higher prices.” The fund, with some $330 million in assets, carries an annual expense ratio of 0.93%, part of the reason Morningstar only rates Torray two stars. Included in the fund are companies with “visible reinvestment opportunities” that allow them to grow their business, as well as companies that steadily generate strong free cash flow and return on capital, Lent said. The names are also screened for risk-adjusted growth. Half of the portfolio’s top ten names have been held for more than 12 years. “We want to buy growing businesses where we can buy them at reasonable prices, and if they’re businesses that are slower-growing but have better valuations, but also grow and have very good capital histories, we want to invest in them as well,” said Shawn Hendon, president of Torray Investment Partners and co-portfolio manager of the fund. TORYX 1Y mountain Torray Fund performance. Apart from the Torray Fund, the firm manages four other concentrated portfolios that also hold between 20 and 30 companies. These portfolios are separately managed accounts of either concentrated large growth companies, small- and mid-capitalization growth names, large value companies and equity income. ‘No real precision to valuation’ Berkshire Hathaway is the fund’s top holding at roughly 7%, followed by power management company Eaton at about 5.4% and insurer Marsh & McLennan at about 4.7%. Each of the fund’s top ten holdings have risen at least 10% over the past year. Shares of Berkshire, for example, have jumped about 34% over the past year. One of Berkshire’s strengths, Hendon said, is that as a conglomerate it doesn’t have to reinvest its cash flow back into the original business that provided the cash. If Berkshire sees better opportunities elsewhere, the company can allocate its cash in those businesses instead, he said. Berkshire shares hit an all-time high on Monday after pit posted fourth-quarter operating earnings of $8.481 billion, about 28% above the same period a year ago, driven by growth in its auto insurance business. Berkshire’s overall earnings, including investment gains from its holdings of publicly-traded companies, more than doubled in the latest quarter. Shares of Eaton, which Torray has owned for more than 12 years, have soared more than 63% over the past year. The company is considered a potential artificial intelligence beneficiary as it provides electrical infrastructure and industrial products for data centers, but it’s also strong in areas such as aerospace that are thriving. Financial services companies American Express and Fiserv are also among Torray’s top ten holdings. The stocks have rallied more than 16% and 13% so far this year, respectively. Measured by sector, Torray Fund is most exposed to financial services, which make up nearly 31% of the portfolio, followed by technology and industrials, according to Morningstar data . Compared to other large value funds, Torray is overweight in all three. Torray is exposed to demand for artificial intelligence in holdings such Eaton, Applied Materials and Qualcomm, but not Nvidia . “It’s over-owned…semiconductors are cyclical and the competition is coming,” Lent said of Nvidia. ” It’s not a stock that we would own, but the business has done phenomenally well.” Torray’s portfolio managers emphasized that they don’t look to make an investment in a particular technology or new business. “We think of valuation in terms of reasonable ranges for the business — given the quality of the business, the management, the history. So we pay attention to the business first, and the valuation last. There’s no real precision to valuation,” Hendon said about the portfolio. “We don’t like to project too far out in the future … so that leads us away from a lot of names with higher valuations with prospects to come.”
