Better Know a Stock Picker

Welcome, Fools, to part 16 of our several-thousand-part series, "Better Know a Stock Picker," which is loosely, but not too loosely, based on Stephen Colbert's "Better Know a District" from The Colbert Report.

Like Stephen and his thorough investigations into America's congressional districts, each week I take a look at a fund you may want to own. What's on tap this week?

Sound Shore Fund (SSHFX)

Expense ratio

0.98%

Fund size

$2.6 billion in assets

1-year return

9.21%

5-year return

7.52%

10-year return

11.21%

Source: Sound Shore Management, Morningstar

Top 10 holdings

Company

% of Assets

Boston Scientific (NYSE: BSX  )

3.7%

Symantec (Nasdaq: SYMC  )

3.6%

Time Warner (NYSE: TWX  )

3.5%

Freescale Semiconductor
(NYSE: FSL  )

3.3%

Baxter International

3.2%

Walt Disney (NYSE: DIS  )

3.2%

Bank of America (NYSE: BAC  )

3.2%

Unilever

3.1%

Sprint Nextel (NYSE: S  )

3.0%

Cigna

3.0%

Source: Sound Shore Management

Meet Harry Burn III and Gibbs Kane
The fightin' team at the Sound Shore Fund is led by Harry Burn III and Gibbs Kane, who together founded the fund in 1985, out of what's said to be a relatively small office in Greenwich, Conn., that peers out onto Long Island Sound.

Such humble beginnings are often the domain of heroes, and you can add Burn and Kane to the ranks. Over the past decade, the team has pummeled the S&P 500 by 2.3% annually. And over the past three years, since John DeGulis was promoted from analyst to portfolio co-manager, Sound Shore is up on the S&P by more than 2.7% annually.

And to think it all began as a side business. Burn told Forbes in a 2004 interview that after seven years of running money for private clients, the board members of the firm's institutional customers convinced him and Kane to start the Sound Shore Fund.

But that don't let history small-f fool you into believing that Burn, Kane, and DeGulis don't take the fund seriously. To the contrary, Sound Shore boasts a highly competitive team. Burn, for example, played football and tennis at the University of Virginia and today is a practitioner of a highly strenuous form of yoga.

How they invest
That's hardly surprising. Yoga requires deep discipline, and both Burn and Kane have plenty. Or at least enough to call their strategy disciplined value investing. This isn't the plain vanilla, discount-cash-flows-till-infinity approach advocated by legendary cheapskates such as Benjamin Graham. Instead, Burn, Kane, and DeGulis seek firms trading well below their historic P/E.

Why eschew the discounted-cash-flow model? Because, Burn told Morningstar in 1997, it's impossible to know what future cash flows will look like. "The problem is that [the model] is so sensitive to your assumptions that you could prove whatever you set out to prove," he said in that interview. "Corporations do not know what they are going to earn this quarter, so for us to pretend that we have 15 years of cash flows to discount is pretty tough."

No doubt, those are fighting words to growth huggers and others among the legions of investapo. Well, I find Sound Shore's arguments compelling. The superior results speak well for the strategy, as does the career of John Neff, who, as the head of Vanguard Windsor, used a low-P/E approach to throttle the S&P for more than three decades.

Is this fund for you?
So, is the team of Burn and Kane the next Peter Lynch? Maybe. They at least deserve mention in the same breath. It's remarkably difficult to beat the market consistently, yet they've done it for more than 20 years without charging exorbitant fees. That's doubly impressive.

My only complaint about this fund -- and frankly, it's a minor one -- is its $10,000 minimum investment for taxable accounts. I won't blame you if you're looking for a more accessible choice. Fortunately, the Motley Fool Champion Funds portfolio gives you a lot, including one run by a legendary stock-picker whose fund sports a $1,000 minimum investment and which has beaten its benchmark by nearly 3% since February, when it was re-recommended to subscribers. (It is also one of many winners for advisor Shannon Zimmerman; try the service free for 30 days to learn more.)

And that's this week's profile. See you back here next Thursday, fund nation. Good night.

Think you can't beat the market with funds? Think again! The selections in Shannon Zimmerman's Motley Fool Champion Funds portfolio are up an average of 19% versus just 11% for their comparable benchmarks. Ask us for an all-access pass to get an unfettered look at all of Shannon's picks, manager interviews, and model portfolios. Go ahead; it's free for 30 days, and there's no obligation to buy.

Fool contributor Tim Beyers is a regular viewer of The Colbert Report. (Stay the course.) Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get the skinny on all of the stocks in Tim's portfolio by checking his Fool profile. Symantec is a Motley Fool Inside Value recommendation. Bank of America is a Motley Fool Income Investor selection. Time Warner is a Motley Fool Stock Advisor pick. The Motley Fool's disclosure policy is always championship caliber.


Read/Post Comments (2) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2008, at 11:48 PM, Sigmundfraud wrote:

    You would have done much better with less risk in SPY, the S&P500 Index ETF. The symbol is SPY.

  • Report this Comment On December 21, 2008, at 11:50 PM, Sigmundfraud wrote:

    I am a money manager and i am totally unimpressed with this performance. You might better have owned SPY which has outperformed this fund and costs much less to maintain. 10 basis points a year vx. 98 basis points for this fund. This is a closet index that underperformed the index.

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