Tuesday, May 19, 2009


It has been awhile since one of us wrote. That is the curse of running a small business, you get pulled in many different directions. We will do our best to write more often.

Back in early March, when the market was down and the anxiety levels were at an extreme, we sent out a letter to clients suggesting that the market was due for a bounce. We certainly had a bounce, and it has greatly reduced the fear levels. Now, I’m not going to make additional predictions about where they market is going, because frankly that’s not what we do. More importantly, we think our time is much better spent reviewing the stocks that we already own and finding some additional highly quality names to add to our portfolios. We have a long list of stocks that we are very interested in buying, but we remain very price sensitive. There is nothing that we have to buy, we only want to commit our clients' capital (and our own) when we are comfortable that the quality of a stock remains high and its valuation is low. This does not change whether the Dow Jones is at 6500 or 8500, it just means it takes longer.

As long as we are patient and disciplined, we are confident that we will add some attractive names to the portfolio, at what will prove to be attractive prices.

Monday, May 4, 2009

Royce Premier Fund

We had a conference call with a principal from Royce, Francis Gannon, on April 30th to discuss the Premier Fund. Following are some notes from the call:

• The Premier fund focuses on firms with strong balance sheets, low debt, high returns on invested capital and strong growth prospects. Of those attributes, a strong balance sheet is the first among equals. They measure strong balance sheets initially by looking for an assets/equity ratio below two (for nonbanks). As we look for similar attributes from the companies that we purchase, we are very comfortable with this approach to quality.

• Most of Premier’s portfolio has a market cap between $500 million and $2.5 billion; there are some holdings with smaller market caps and some with larger ones. If a holding grows above a $2.5 billion market cap they can hold it but can’t add to it.

• Royce reopened fund in January 2009 because they were, and are, seeing some very attractive opportunities in market place. Since the fund has been reopened inflows have been modestly positive. The fund size is about $3 billion, which we feel is a little large for a small cap fund and certainly bears watching.

• Royce develops a cap rate for each company they own or consider buying. This cap rate is defined as earnings before interest and taxes (EBIT) divided by enterprise value (market capitalization plus debt minus any cash). They would like to buy companies with a cap rate greater than 15% and they look to sell companies when they have a cap rate at or below 5-7%. They are currently finding companies with cap rates over 20%. When purchasing stocks we believe valuation is essential. While Royce looks at a different metric than we do when valuing a company, we are comfortable that they apply it consistently and prudently.

• Royce buys stocks with the idea that they will hold them for 3 to 5 years. The portfolio is currently underweight financials. The managers are still are not buying banks, but they are buying exchanges, brokers and insurance companies as well as investment managers.

• Another theme was buying the shares of companies the portfolio managers know well and where the stock price dropped well below Royce’s assessment of their business value. Schnitzer Steel Industries is an example where Royce had been reducing its position earlier in 2008 at prices over $100/ share. The stock plunged into the teens in the fourth quarter and so the fund rebuilt a position. Wabtec (old Westinghouse Air brake) and Ralph Lauren were other high quality companies that the fund bought as stock prices declined.

• The portfolio is currently 6-7% international. By prospectus Premier can go up to 25%, but the highest it has ever reached is 10%. The largest foreign holding is Sims which is headquartered in Australia. The firm bought Metals Management last year and is currently is in the process of relocating its headquarters to the US. We have no concerns about the Premier Fund’s ability to buy stocks outside the US. One of our beliefs when picking funds, is that giving good managers more freedom to find attractive opportunities benefits the fund holders.

• The fund attempts to manage risk primarily by its focus on high quality, low debt companies. Another risk management tool is that no more than 25% of the fund can be invested in any industry.

Overall Royce Premier continues to meet our requirements for ownership. It has an impressive track record and was down 10.70% over the quarter and up 0.91% annualized over the last 5 years (periods ending March 31, 2009). The individuals (Chuck Royce and Whitney George) responsible for that track record are still in charge of the fund. The investment philosophy is clearly articulated and appears to be consistently applied. And the managers have strength in their convictions as evidenced by the fund holding 68 stocks, a reasonable number for a smaller cap fund. We continue to think it is a worthwhile holding for our funds and our clients who need small company exposure in their portfolios.

Disclosure: Harvest Financial Partner owns the Royce Premier Fund in its client portfolios. The authors own the Royce Premier Fund. Positions can change at any time.

Friday, May 1, 2009


We have been owners of Bruce Berkowitz’s Fairholme Fund for some time now. Here is a link to a Morningstar article comparing Bruce to another pretty good investor – Warren Buffett. Have a read to get an idea how Bruce is allocating his investors' capital.

Disclosure: Harvest Financial Partners owns the Fairholme Fund in client portfolios. The author owns the Fairholme Fund in his personal portfolio. Positions can change at any time.