Jim Polk, left, and Prabha Carpenter co-manage the Homestead Value fund.
Photograph by Jared Soares
Prabha Carpenter had an opportunity most value investors only dream of. At her first analyst job at insurer Geico’s investment division in 1979, she got to pitch ideas to Warren Buffett.
To be “a newbie presenting ideas to Mr. Buffett in your first few years—it was just an extraordinary training ground,” says the senior equity portfolio manager of the Homestead Value fund (ticker: HOVLX).
Carpenter and her co-manager Jim Polk employ a Buffett-like style of seeking high-quality value stocks—not just the cheapest ones, but those with strong businesses that can weather a storm. The strategy works. Over the past five years, the $1 billion fund has beaten 83% of its peers in Morningstar’s Large Value category, with a 13.3% annualized return versus the category’s 11.2%. Over the past decade, it has beaten 89% of its peers—and the fund’s 0.65% expense ratio is less than the category’s 0.82% average.
Carpenter studied economics at the University of Madras in India, and got her M.B.A. in finance at American University in Washington, D.C., in 1977. In her investment analysis class, she wrote a report on Delta Air Lines (DAL) and submitted that report during her interview at Geico, which was based nearby in Chevy Chase, Md.
At the time, Buffett’s Berkshire Hathaway (BRK.A) had invested in Geico but hadn’t yet acquired it. (It did in 1996.) Buffett would come to D.C. to “attend the Washington Post board meetings and visit us at Geico,” Carpenter recalls. “The investment management business is an insular, somewhat white male preserve. But that didn’t matter at Geico. I was chatting with these extraordinary legends in their own time.” Buffett, she says, was “intellectually curious,” and always listened to her ideas, even though she was new to the field.
In 2002, Carpenter joined RE Advisers, the investment advisor for Homestead Funds, as a senior equity analyst, then took over as manager of the Homestead Value fund in May 2014. Polk joined Carpenter as co-manager in 2019 after 17 years at Putnam Investments.
One thing that differentiates Homestead Value is it invests like an institutional pension plan fund, with a focus on long-term investing. Pension plans hold employees’ assets for decades. Homestead Value usually holds individual stocks for at least five years, maybe adding two or three positions annually to its portfolio of about 50 stocks.
Homestead Funds and RE Advisers are subsidiaries of the National Rural Electric Cooperative Association, or NRECA, a trade association that represents 900 nonprofit electric cooperatives throughout rural America. The NRECA also offers pension plans for more than 100,000 active and retired electrical line workers. RE Advisers runs those pension plans in the same style as the Homestead funds. The Homestead Value strategy includes both the fund and institutional private accounts for the pension plan, amounting to roughly $4 billion in assets, and runs them in a largely identical style.
“We look at things over a longer time period than many managers, and we feel that thoughtfulness, thoroughness, and disciplined process leads to superior returns over time,” Carpenter says. Such careful thinking is essential when you have the retirements of 100,000 workers in your hands. “In our lobby, at the NRECA building [in Arlington, Va.], there’s a statue of a lineman, and we see the statue going into work every morning and leaving every day. Our commitment is to serve [those workers].”
The institutional focus also means Carpenter and Polk are highly aware of the fund’s benchmark, the Russell 1000 Value index. They, of course, try to beat it, but they won’t stray too far from it in terms of sector exposure. (Pension-plan funds tend to have stricter investment mandates requiring more consistent strategies than retail funds.)
Homestead Value
| Total Return | |||
|---|---|---|---|
| 1-Yr | 5-Yr | 10-Yr | |
| HOVLX | 16.0% | 13.3% | 13.1% |
| Large Value Fund Category | 20.1 | 11.2 | 11.6 |
| Top Ten Holdings | |||
| Company / Ticker | Weighting | ||
| Alphabet / GOOGL | 4.9% | ||
| Microsoft / MSFT | 4.9 | ||
| JPMorgan Chase / JPM | 4.7 | ||
| Abbott Laboratories / ABT | 4.1 | ||
| Honeywell International / HON | 4.0 | ||
| Avery Dennison / AVY | 3.8 | ||
| Parker-Hannifin / PH | 3.3 | ||
| Pfizer / PFE | 3.1 | ||
| Bank of America / BAC | 3.1 | ||
| Goldman Sachs Group / GS | 2.8 | ||
| Total: | 38.7 |
Note: Holdings as of Dec. 31. Returns through Feb. 7; five- and 10-year returns are annualized.
Sources: Morningstar; Homestead Funds
The fund owns some traditional value stocks in the financial sector, which was 19.7% of the fund’s portfolio as of Dec. 31. Yet Carpenter points out that a holding like Bank of America (BAC) doesn’t have the problematic overleveraged balance sheet it once did during the 2008-09 financial crisis. Today, “banks are extraordinarily well capitalized, maybe overcapitalized,” she says. The fund’s largest bank holding, JPMorgan Chase (JPM), is “a long-term holding, and they weren’t part of the problem during the global financial crisis. They had the fortress balance sheet.”
But Carpenter and Polk will also pay up for quality. That’s why the fund’s 13.3% tech stock weighting exceeds that of the Russell 1000 Value’s 10.2%. Microsoft (MSFT) and Google parent Alphabet (GOOGL) are two of the fund’s largest holdings.
Many of the fund’s holdings are index fund mainstays, but Carpenter and Polk add value through their timing and patience.
“We were studying Alphabet for a while. We went up to New York [in 2015] and spoke to some analysts there, and it looked like Alphabet had a huge, long runway with opportunities in digital advertising, but the valuation just wasn’t right,” says Carpenter. In early 2016, concerns about China’s economic growth weighed on the stock, allowing the team to snap it up in the $700 range. Today Alphabet trades for around $2,790.
While patience is a touchstone of their investment approach, the team can be agile when necessary. After the pandemic market crash in March 2020, Carpenter and Polk quickly built positions in retailers they thought could weather the storm, such as TJX (TJX), Home Depot (HD), and Ulta Beauty (ULTA). But more typical of their strategy was their studious assessment and eventual purchase of Target shares (TGT) during 2021’s calmer second quarter.
“We made phone calls, read [executive] transcripts, went through the [regulatory] filings. But that was the easier part,” Polk recalls. “Then there comes a discussion: Does this fit into the portfolio? Do we believe these market share gains are sustainable and why? Does it make sense from a valuation standpoint?”
Carpenter and Polk concluded that Target was making important changes to its stores that would enable it to compete more effectively with Amazon.com (AMZN). The stores are becoming smaller, more efficiently run, and have better product selections. Also, Target now has stores within its stores from popular vendors to draw customers in. “Apple and Disney are going in there, so you’re getting something that makes [shopping] more experiential, which Amazon can’t do,” Polk adds.
Given the fund’s long investment horizon, it’s too soon to know if the team’s Target investment thesis will hit its mark. But one thing is certain: Carpenter and Polk will wait patiently to find out.
Email: [email protected]
