Ticker Symbols

QVSCX (Class A) QSCCX (Class C) QSCIX (Class I) QSCNX (Class R) QSCYX (Class Y)

Investment Advisor

OFI Global Asset Management, Inc.


Subadvisor

OppenheimerFunds Inc

I Want Information

Unanticipated Acceleration in Returns

Jun 16, 2017

Oppenheimer Mid Cap Value Fund

  • AUM

    $1.4 billion

  • Inception Date

    Jan 3, 1989

  • Portfolio Holdings

     

  • Portfolio Turnover

     

Q: What is the history of the fund?

The Oppenheimer Mid Cap Value Fund was originally launched on January 3, 1989. Eric and I, the co-managers of this fund, took over in 2013. 

Q: How is your fund different from its peers?

Our objective is to outperform the fund’s benchmark, which is the Russell Mid-Cap Value Index. We aim to accomplish that by maintaining comparable systematic portfolio risk and then add value from a bottom-up stock selection. We do not just focus on the cheapest quintile, or the market based on price-to-book or price-to-earnings, what we are really motivated by is identifying what we call unanticipated acceleration in return on invested capital (ROIC).

We identify assets that look statistically cheap and try to understand what the expectations are that are causing that apparent cheapness. Our research effort is built around contemplating changes, at the company or market level, including changes in revenue growth, profit margin, and asset efficiency. For a value investor, that approach is fairly uncommon.

We believe that the value of a public equity is as much driven by behavior and narrative as it is by cash flow and interest rates.

Q: What core principles guide your investment philosophy?

We take the contrarian view that value is defined by an evolving market perspective, as opposed to a universal truth that is intrinsic. . Our research process is built around a three-part framework that interprets value relative to expectations, estimates how those expectations might change, and then evaluates any changes. We believe that the value of a public equity is as much driven by behavior and narrative as it is by cash flow and interest rates. 

The other philosophical guide we follow is collaborative decision making. We make sure that every investment idea that we put into the portfolio has multiple perspectives, and that at least two members of the team have come to the same conclusion that there is alpha embedded in the investments we make.

The reason collaboration is important for us is that public equity markets are a mix of uncertainty and ambiguity. We find that philosophically we need to have a collaborative decision-making framework in order to better interpret that mix of uncertainty and ambiguity.

Q: How would you describe your investment process?

Unanticipated acceleration in return on invested capital is the guiding principle of our investment process. Our team members find investment ideas using their own screens and bottom-up research process. They also meet with company management and other sources to identify investable change in the marketplace. 

The ideas are vetted in the matrix structure of our team, which is divided into smaller groups we call ‘pods’. Each pod is comprised of at least three people and we have a pod for each market sector.  

Once we begin working on an individual idea, we focus on three F’s: understanding the free cash flow generation of the company; forecasting what the future looks like; and factor exposure. We assess statistical attributes such as deep value or dividend yield or currency exposure. When we have developed a deep understanding through the three F’s, the portfolio manager makes the final call and configures the portfolio to match the risk profile that clients are looking for. 

The last part of our process is our sell discipline. We look for situations where we do not have a gap between valuation and the current expectations of return on invested capital That sell discipline ties directly back into our initial investment process.

Q: What are unanticipated changes for you?

We believe that the market cannot always fully price in the full distribution of probabilities and that that opens up the opportunity for alpha to exist within a return structure. Having a structural investment framework allows an active manager to have an edge, which takes advantage of unanticipated changes. We have a very deep dedication to creative thought. The idea there is that there is alpha generation possible from an inherently creative process - whether it’s a unique algorithm created by a programmer and executed by a computer or an individual who is just thinking about the probability structure differently.

Thus, a creative thought process that identifies an outcome that is not contemplated fully by the market is by definition unanticipated. So that’s why that phrase is such a critical part of our philosophy.

We rarely want to be exposed to the external characteristics. Our goal is to make sure we look similar enough to the Russell Mid Cap Value from a risk standpoint, and that we have a pristine allocation argument for our clients, but that we are different enough at the stock level to have a clear alpha generation opportunity. That balance is very quantitative for us.

Q: Could you illustrate your research process with a few examples?

One good example is Coach, Inc., the multinational luxury fashion company. Initially a handbag maker, the brand had moved into the accessory businesses and added some men’s fashion -- and ultimately had fallen on hard times, with multiple years of underperformance. The company had potential as a value stock. 

While the retail headwinds of the last five years had created a bad backdrop for Coach, there were some executive changes which drew our attention. They began pulling back from some retail outlets and getting back to the higher margin business, which to us signified a ROIC acceleration from profit margin. As a result, we decided to take a small position in that stock. 

Our portfolio had an underexposure to retailers and that was a risk that we wanted to balance. Coach provided the retailer characteristics we were looking for to balance some of the short-term volatility that came from other retailers. 

Coach is still in our portfolio. It now represents a move beyond our margin expansion thesis in that it may now be able to grow revenue through acquisition, on top of its margin expansion, which provides much more sustainable profit growth.

Q: Why did you choose Coach over other underperforming retailers like Ralph Lauren?

Ralph Lauren is another name we find interesting and are looking at. However they have a much more complex portfolio of products, brands, outlets, and regional distribution. We’re taking some time to identify the components of the business that might lead to a successful turnaround.

With Coach, we saw value, but, we held back until they started drawing down inventory and trimming their distribution channels. The gross margin started to improve and the business started to show accelerating profitability. Ralph Lauren has the potential and they have brand value, but we will watch to see if things start to work.

Q: Can you give another example?

Another example would be the cruise line industry. Just after the Costa Concordia tragedy, where the Italian cruise ship jointly owned by Carnival Corporation capsized and sank after striking a rock, Carnival brought in a new CEO. The company started talking about consolidating the 10 distinct brands within the Carnival family. The individual brands, each with its own president, competed against each other in the marketplace for the same passengers.

We knew that cruise line stocks were depressed because of competition, but that there was value in the industry.  After looking at a number of individual companies in the industry we started to understand that the three main competitors, Carnival Corporation, Royal Caribbean International and Norwegian Cruise Line, were all talking about returning to double digit returns.

In order to accomplish that, they all needed better prices. The three companies started competing, not on price, but on the travel experience. That reflected today’s growing focus on the consumer experience when purchasing clothing, electronics, and hard goods. 

We saw the industry structure begin to shift and line up with our core investment philosophy of accelerated return on invested capital -- as the underlying trend of consumer behavior became aligned with companies’ improved pricing discipline. Royal Caribbean and Norwegian Cruise Line are regular holdings within our portfolios, and our performance has benefited by recognizing and taking advantage of the structural shift in the cruise industry.

Q: How is your portfolio constructed? Is diversification part of your construction process?

We put a lot of effort into diversification. We employ quantitative techniques in evaluating style factors that can be replicated in smart beta portfolios. We strive to be diversified across the factor spectrum and maintain the majority of our tracking error through idiosyncratic risk in our portfolio.

In building our portfolio, we tend to stay focused on our ROIC acceleration thesis. It is the characteristics of the stock that determines how large a position we want to take.

For a very cyclical business with a high degree of volatility, we might not want to be more than a 150 basis points. On the other hand, for a company with low volatility, we can own much more than 150 basis points to make an impact on the idiosyncratic alpha. 

So, we spend a lot of time analyzing the components of risk and return to make sure the portfolio is diversified. We then focus on the idiosyncratic drivers of unanticipated ROIC acceleration to generate outperformance. We evaluate the entire portfolio to make sure that the traditional metrics, like tracking error and standard deviation and beta, all fit within the measures expected by our clients.

Q: Do you have any limits on maximum position sizes and at the sector level?

We do not want any single stock contributing more than 10% of our tracking error; and at the sector level, we don’t want any single sector contributing more than 20% of the tracking error.

Q: How do you define and manage risk?

First and foremost, our clients are focused on absolute returns. Regarding risk management, we look at risk through the eyes of our clients. We manage the portfolio to minimize the downside relative to the performance of the Russell Mid-Cap Value Index. Our objective is to outperform the market in a down market by a little bit more than we do in up market. Over time, we want to outperform the market with less volatility. 

Annual Return 2019 2018 2017 2016 2015 2014 2013 2012 2011
QVSCX - - 13.29 20.28 -7.02 10.57 37.76 9.48 -7.52