TCW Relative Value Large Cap Fund

According to S&P Equity Research, in the third year of a bull market, large-cap stocks historically outperform small-cap stocks and this trend is likely to continue in 2011. For investors looking for inexpensive way to play this theme ahead of the March birthday, but with a value slant, S&P five-star ranked TCW Relative Value Large Cap Fund (TGDIX 14 *****) is worthy of consideration.

TGDIX produced relatively strong total returns on a five-year annualized basis and recently owned a number of stocks that S&P Equity Research concurs are attractive. Further supporting the fund’s top ranking from S&P is lead manager Diane Jaffee’s long tenure at the fund plus below-average cost factors.

Jaffee, who has been with the fund since inception, and her team at TCW uses traditional metrics to search for value including regularly comparing the stocks’ dividend yield and its price to its sales, book value, cash flow, or its earnings relative to that of the S&P 500 Index before undertaking further fundamental analysis. The latest portfolio from December 2010 is comprised of 49 holdings that Jaffee and six dedicated analysts collectively believe have improving cash flow, a low cost structure, and growth catalysts such as new products or management. Despite the value slant, we find the fund well diversified on a GICS sector basis, with representation in all sectors and large exposure to information technology (18% of assets), financial services (16%), energy (14%), and industrial (13%) companies.

As of January 2011, TGDIX’s one-year total return of 25% bested its large cap value peers 19% gain and the fund’s three- and five-year record were also relatively strong. Both 2009 and 2010 were stellar performance years for the fund, up 17% (13% for the peer group) and 33% (24%), respectively and followed a wider loss of 41% (38%) in 2008.

While returns have been more volatile than peers, it is notable that the risk-adjusted record, using Sharpe ratio, is 10% better than average.

But looking beyond past performance helps to understand what makes TGDIX an S&P five-star fund. Seven of the 10 largest holdings in the fund as of December are currently viewed as attractive using S&P STARS—a qualitative analytical tool—and six are undervalued using S&P Fair Value—a quantitative tool—that helps form the performance analytics of the S&P mutual fund ranking. Meanwhile, six of the largest stocks receive an above-average S&P Quality Ranking of A- or higher—a metric recognizing earnings and dividend consistent growth– that helps mitigate the risk characteristics of the holdings.

Within the energy sector, one such holding is S&P Buy recommended Baker Hughes (BHI ****), an oil and gas equipment and services company that fund manager Jaffee noted in a late January interview was trading at a price-to-book discount to the broader market. She thought BHI was poised to benefit from international market growth and from new products following its 2010 acquisition. Meanwhile, the fund’s largest holding is integrated oil and gas company Chevron (CVX *****), an S&P Strong Buy that has an S&P Quality Ranking of A.

TGDIX’s second and third largest fund holdings are financial services companies JPMorgan Chase (JPM ****) and Travelers (TRV *****), which are independently considered attractive on both S&P valuation metrics. According to TCW, both companies’ stocks traded recently at price-to-book and price-to-earnings discounts but also have sizable cost-cutting opportunities following acquisitions; Jaffee believes JPMorgan can benefit from cross selling its products in branches and is poised to use its growing cash balance to increase its dividend.

While the fund has a relatively low turnover rate, recently 34%, indicating that management uses a long-term horizon for making stock selections as certain investment ideas take time to play out, a couple of additions and deletions typically occur during each calendar quarter. One such successful new holding added in mid ’10, according to Jaffee, was Terex Corporation (TEX ****), currently an S&P Buy recommended industrial company that makes cranes and construction equipment. Jaffe indicated that the stock was trading at approximately $20 a share when added to the fund, but had a sizable cash balance following the sale of its mining business and strong inventory controls to support cost cutting initiatives. While the shares have climbed since mid 2010, according to TCW the stock still traded at a price-to-book and price-to-sales discount to the broader market in January; other stocks added to the portfolio in 2010 included Allstate (ALL ****) and Sprint Nextel (S ****).

TCW Relative Value Large Cap Fund ranks as an S&P five star fund not only because of its strong risk-adjusted track record and its below-average expense ratio of 1.1% compared to its peers 1.3%, but also based on S&P’s proprietary holdings-level analysis. But as with all investments, S&P believes that investors should look to make selections that are suitable for their objectives and risk profiles. To learn more about the S&P’s mutual fund offering including reports on approximately 22,000 mutual funds, visit advisor.marketscope.com.

Note: The fund rankings in this article — from five star (best) to one star (worst) – are quantitatively derived from performance, holdings, risk, and expense analysis. S&P Equity Research’s stock rankings or STARS — using a scale of 5-STARS (Strong Buy) to 1-STARS (Strong Sell) — are based on S&P equity analysts’ qualitative and fundamentally driven outlooks for stocks over the next 12 months. S&P’s views on stocks and mutual funds are constantly re-evaluated; the rankings in this article are correct as of February 14, 2011.

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