By Reshma Kapadia

With geopolitical and macroeconomic forces whipsawing markets, Alan Berro and his team at American Funds Washington Mutual are keeping their heads down and focusing on the "blocking and tackling" of stock-picking. Over time, that approach has helped the fund weather the most volatile periods better than peers -- and it's working right now.

Berro says he leaves the macro forecasting to hedge fund heavies like Bridgewater's Ray Dalio. Instead, he zooms in on company fundamentals as the veteran on a nine-person team managing the fund, which was launched in 1952 and focuses on established dividend-paying companies.

Over the past 15-years, the $190 billion fund's average annual return of 12.5% puts it in the middle of the pack of large-cap blend funds. But it stands out for superior risk-adjusted returns: In market declines over the past decade, it has suffered significantly less than peers, according to Morningstar. That resilience has been on display this year, with the fund returning 2.3%, beating 89% of its peers.

The fund aims to yield more than the S&P 500 -- today it yields about 2%, compared with 1.4% for the index. The managers look for companies that have paid a dividend for eight of the past 10 years. Although there are exceptions, no more than 10% of the fund is in companies that don't fit the parameters exactly. Amazon.com and Apple are among those, and Berro notes that the bar for inclusion is higher for companies that don't meet the full dividend qualifications. With 81% of the S&P 500 paying a dividend at the end of 2024, the universe is expanding.

Berro started as an analyst in 1991 at Capital Group and covered Enron, the energy company that famously imploded in 2001. While many said Enron was a "must own" stock that was going to transform the world of electric utilities, Berro could never make the numbers work and steered clear of it. That experience has stuck with him as he evaluates the current era's popular stocks and themes.

Barron's spoke with Berro in late April and checked in again in early May to hear about the stocks he is gravitating toward now.

There's a lot of volatility in the markets. How do you guard against losses right now?

Alan Berro: Basic blocking and tackling: good analysts doing pure research and not chasing fads and trends, buying good companies at a decent price, and holding them as long as we can and as long as their stories are going in the right direction. In environments that are volatile, you have to be careful when you buy companies with high price/earnings ratios based on high expectations -- where the market is in a frenzy and saying, "You have to own it."

Does artificial intelligence fit the description of market frenzy?

We own Broadcom but didn't run out and buy every AI company. We believe AI is here and real but it's always a matter of what you pay. In the dot-com bubble, [investors] paid a lot for a lot of nothing and everything went down -- so you often get another opportunity.

What does your valuation approach look like?

We don't have hard rules, but look at current valuations versus prospects for every holding every day. Our turnover is 25% to 30%, so we turn over the portfolio every four years, which is much less than others. Broadly, we like to buy stocks at a price/earnings ratio of 1 to growth, and sell at three times.

Our process is usually underweight tech stocks because [many] don't pay dividends and have higher valuations. But we own some: Microsoft and Broadcom are among the largest positions in the fund.

What drew you to those companies?

Broadcom, for example, has had an aggressive dividend strategy over time. The stock shot up with AI, creating probably the largest gain we ever had in a single company. We owned a lot of it, establishing a position when it was trading in the low-teens and had a growing dividend.

[The opportunity] came when most of the market had lowered expectations, but our analyst identified early that [Chief Executive] Hock Tan was really good and pushed us to own it because he shared Hock's vision. And Hock kept doing deals. Everyone said they were bad deals -- like his purchase of Computer Associates and VMware -- but they turned out to be huge winners. He is very good at doing deals and had a company well positioned in the ASIC [application-specific integrated circuit] chip market, so when AI came around, it was one of the beneficiaries. That is the type of opportunity we look for.

We bought Microsoft when there was a management transition from Steve Ballmer to [now CEO] Satya Nadella. Our team recognized this company had tremendous potential, and Satya brought a new vision. He got the company back to basics, getting out of things not making money to focus on core franchises. The stock is up 10 times. Knowing management is one area we can bring something to the table.

Are there any potential turnarounds on your radar?

We are watching Nike, with its new management team, and Starbucks could be in that category. They have rich history and world-class global brands -- every element you want in a leadership company. The question is if they will be able to put Humpty Dumpty back together.

They resemble past investment cases like Microsoft, where a management change helped unlock value. In each case, strong underlying assets -- research and development for Microsoft, brand equity and global footprint for Starbucks and Nike -- provided a foundation for transformation.

At Starbucks, the new CEO [Brian Niccol] -- formerly of Chipotle and Taco Bell, has a proven record of operational turnarounds. His past successes include streamlining menus, improving service times and food quality, and revitalizing brand perception. While near-term investments may weigh on financials, we believe his leadership could drive long-term value creation. Estée Lauder could be in that basket, too, though that may be a bit tougher.

How so?

Estée Lauder has a multipronged strategy that needs a lot of things to go right. It may be too much. They have management-transition issues to figure out; they have a product lineup that may be out of sync with the customers, who often get advice on personal-care products from Tik Tok and influencers. They have a cost structure that needs to come down, and they have a lot of exposure to China, which is in flux given the current tariff and political issues. So you need a management fix, cost rationalization, a product lineup reset, and the return of the China market to get this one to be a home run.

What other stocks are underappreciated?

We see a bit of that in the healthcare sector with Amgen, which has a broad-base business with good market share in existing drugs that lower LDL cholesterol, and exposure in their pipeline to a few rare diseases. It also had a Phase 3 GLP-1 drug that will probably be No. 3 in the category and a contender in a way the market isn't giving it credit for. One differentiator is the number of injections per month or year that will be needed for its longer-acting GLP-1 drug. Patients and physicians will likely prefer having to administer a shot only four times a year versus every couple of weeks. One of the risks associated with drugs in this class is reports of nausea, but if Amgen can mitigate this side effect, this could lead to greater acceptance in the market. Amgen currently trades at 17 times consensus P/E with a 3.5% dividend yield, compared with Eli Lilly, which trades at two to three times that and yields less than 1%.

We have also owned Gilead for some time. It has an unbelievable HIV franchise, which has been under attack on reimbursement issues. But [the drug] may be the best option for an at-risk population. The company has a lot of cash and a promising pipeline. They also have a strong dividend policy, growing dividends per share by over 4% for the past five years. It is currently yielding about 3%, with potential for continued dividend growth. I consider this a company where you get paid to wait on their pipeline. There might still be value there.

What are some of your holdings that are more domestically oriented?

Comcast. Most people would say it's crazy to own. But it's trading at nine times earnings and pays a 4% yield. Not that much has to go right. It's a U.S. cable and internet company and has some entertainment assets and unbelievably good theme parks -- with more coming -- that no one is giving it credit for. There's more upside than downside.

On your team, you tend to wear a value hat. Do you see value making a comeback?

Growth stocks have dominated for over a decade, buoyed by zero-interest-rate policies and low inflation. But the landscape has shifted. We're now in an environment of positive real rates, higher inflation, and a 10-year Treasury yield around 4% -- a backdrop that could support broader market leadership.

Pending tax legislation may [also] echo the president's first term, where accelerated depreciation was a key outcome -- potentially favoring asset-heavy businesses.

In my sleeve of the fund, my largest sector exposures are information technology, financials, healthcare, and industrials -- which includes holdings in aerospace and defense names that benefit from the aerospace supercycle, like Boeing, L3Harris Technologies, and Northrop Grumman; and cyclicals like Caterpillar, which [benefits from] power-generation growth. I also hold food and beverage names such as Constellation Brands and Keurig Dr Pepper, which I see as attractive upside potential with modest starting valuations.

That sounds like a yes. What are some lessons you have learned over the years?

Be suspicious when the yield gets too high. The first and foremost [lesson learned] is knowing when to cut your losses. This is often hard to see: You buy a stock; the story isn't coming together the way you hoped, but you keep rationalizing holding on because the stock keeps getting cheaper to reflect the worsening situation. This then makes the yield become what appears to be very attractive -- until the fundamentals can no longer support the dividend and the dividend gets cut.

This is often a typical pattern in value stocks, and a common mistake of value investors. Being able to differentiate when something is cheap and when it is a complete value trap is hard. Understanding both the income statement and the balance sheet is key, as well as understanding the motivation of regulators, rating agencies, and government officials. When the dividend yield gets to two or three times what other good companies in the industry offer, you are usually headed for trouble.

Thanks, Alan.

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May 30, 2025 21:30 ET (01:30 GMT)

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