(This article was originally published Tuesday.) -- Fund invests in large-cap stocks it thinks are undervalued by the market -- Returns of about 10% over past three years slightly lag its category -- Sees opportunities in industries such as medical devices and banks By Annie Gasparro For Perkins Investment Management, defense is the best offense. Kevin Preloger, co-manager of Perkins Large Cap Value fund (JAPIX), says that he's not just looking for under-valued stocks, but also he's aiming to limit the risk, which can be high for a typical value fund. "When most funds are looking for good quality companies that are on sale, they don't focus on the downside risk. That's what separates us from the others," Mr. Preloger said. He said he likes to invest in companies with low valuations, that still have "healthy amounts of free cash flow," earnings stability and not a lot of debt. Right now, that includes some pharmaceuticals, medical devices and regional banks. "For example, medical devices companies have suffered due to volume declines from the weaker economy. People are putting off knee and hip replacements, but there's only so long you can put those off," Mr. Preloger said. Also, the pharmaceutical industry offered several opportunities as investors were so worried about expiring patents for drugs that they weren't considering all the drugs in the companies' development pipeline. Perkins Large Cap Value fund began in 2008. Perkins initiated a large-cap strategy in 2006 after using the same philosophy with small-cap value and mid-cap value funds. "Large-cap stocks were cheaper than small-cap in 2006, so we felt like there was good value there," Mr. Preloger said. "Not that we expected a huge rally or anything, but there was much less downside risk relative to small- and mid-cap in all sorts of economic environments." Over the past year, the fund has seen a slight decline in returns, in line with the category, but over the past three years, it has grown 10.2%, about one percentage point behind its category, which grew 11% through Monday's close, according to Morningstar. Morningstar analyst Katie Reichart said Perkins has a "pretty good long-term track record as a firm for executing on this strategy, which gives us confidence in this fund, even though it's fairly new." The fund now has more than $136 million in total assets. In the first quarter, J.P. Morgan Chase & Co. (JPM) and Allstate Corp. (ALL) were among the top contributors to its returns, while companies such as EXCO Resources Inc. (XCO) and Entergy Corp. (ETR) were top detractors, according to Perkins. Natural gas and oil has been a problem area since last year. "The production of gas was rapidly increasing and the demand wasn't there, so gas prices went through the floor, but we believe that will be a shorter-term issue," he said. "So far we've been early, but I think longer term we're going to be right as gas prices revert to the mean relative to other energy sources." Ms. Reichart said that in value funds like this, "you're always going to have some stocks that don't do as well, but they're not all-in in energy," she said. "It's all about maintaining that balance." Mr. Preloger said the defensive strategy is helpful for attracting investors too, given how weary they are of the markets. "We have seen tremendous outflows from the equity markets, and issues like the flash crash or the Facebook IPO erode investors' confidence in the equity markets even more, but over the long term, we believe that stocks are much more attractive than the alternatives," he said. Write to Annie Gasparro at annie.gasparro@dowjones.com
