10 Questions: At Charles Bath's New Value Fund, There's No Room for Tech

Click on the company name to jump to Bath's comments on the stock.

Black & Decker

Brunswick

Centex

ConocoPhilips

Countrywide

Maytag

Merck

Pfizer

Schering-Plough

SunGard Data Systems

Trinity Industries

It might seem unusual to devote this week's 10 Questions to a mutual fund that has a mere $3 million in assets under management. However, it's also unusual to find a $3 million fund managed by a skipper whose previous fund turned in a 20-year streak of successive positive years.

The fund is (DHLCX Quote)Diamond Hill Large Cap, and the manager is Charles Bath. Bath joined the tiny fund in September, after running the $1.5 billion (NWFAX Quote)Gartmore Total Return fund (formerly the Nationwide Fund) since 1985. From 1978 to 1998, his fund stayed in the black. Then, in 1999 -- when pimple-faced fund newbies were posting triple-digit returns -- Bath posted a fractional loss because he stuck to his investment guns. He says he's proud of his performance in 1999, and he's overjoyed to be taking his expertise and impressive record to a new shop.

Why does a fund manager skip out on a $1.5 billion fund to manage an unheralded fund with $3 million in assets? Why did he bypass the 1999 mania? Looking forward, why does he say tech has no place in his value fund? To find the answers to these questions and more (and a lot of stock picks), read on.

1. These days, people are finding value in funny places -- semiconductor-equipment makers and telecom outfits, for example. How do you define value and where are you finding it?

We define value as any stock in the public marketplace where you find that it's less expensive than what the company is worth. Now, what's a company worth? Whatever an informed buyer would pay for it. It may be reflective of nothing more than well-priced earnings or well-priced cash flow, or it may be a discounted asset value.

I'm a large-cap fund investor, but I'm finding the most value in sort of the smaller end of the large-cap universe, if you will -- stocks around the $4 billion to $5 billion market capitalization. I'm finding the best values away from the megacap stocks.

Charles S. Bath, Diamond-Hill Large-Cap

Tenure: Managed fund since Sept. 23, 2002

Assets: $3 million

Top Three Holdings: Belo, Pittson Brink's Group, Devon Energy

Expense Ratio: 1.4% (Category average: 1.45%)

Diamond Hill Information: 888-226-5595 or diamond-hill.com

Source: Morningstar, Diamond Hill

2. What compelled you to make the change from managing a $1.5 billion fund ...

... to a $3 million fund? (laughs). Most normal people work the other way.

Some friends of mine have been involved in Diamond Hill for a while, which is a relative startup. I'm 47 years old, and it was a time in my life where I felt, "If I didn't go now, I'd probably end up asking years later why I never made a move." It was a now-or-never thing. Also, I'm very attached to the Columbus, Ohio area, and this was an opportunity to try to build a business in Columbus.

3. Gartmore Total Return [previously known as the Nationwide Fund] was one of only two funds to manage 20 years in a row of positive performance from 1978 to 1998. Yet in 1999, a year in which it seemed just about anybody could have a great year, your fund lost 0.4%. What were you thinking at the time and did you feel like you were making the right moves?

I don't want to sound too self-serving, but I wouldn't invest with anybody who had a good 1999 (laughs).

In many ways, 1999 separated value investors from momentum investors. We are not going to have another 1999 for a decade, if not decades -- well, possibly for the rest of our investment lifetime. Sadly, some of the best managers of our generation were lost to 1999 (laughs). Julian Robertson closed out his hedge fund, other good fund managers left the business. I was flat in a year when the S&P 500 was up more than 20%. That's not good, but when you consider the alternative, which was losing investors a lot of money in the subsequent years because you let down your guard on valuations, I'm actually quite proud of the way I managed the fund during that entire time.