Thursday, June 25, 2009
Manager Change
We came in this morning to be greeted by this press release from the Oakmark Funds informing us that Chad Clark, the co-portfolio manager of the Oakmark International Small Cap Fund, has left the fund and firm. We take manager changes very seriously and prefer the managers of funds we use to stay around for a long, long time. At times, manager changes cause us to leave a fund, but we won’t be doing that in this case for two reasons. First, David Herro, who is the lead portfolio manager on this fund, is still in place. Second, Oakmark has a very clear philosophy of purchasing high quality companies trading at discounts to their intrinsic value that drives the investment process of all their funds. So we do not believe that Mr. Clark’s departure will lead to a fundamental change in the approach and performance of the Oakmark International Small Cap Fund. Still, while we monitor all the funds we use for client portfolios, we will be watching this one a little more closely.
Tuesday, June 2, 2009
The Delafield Fund
Barron's recently interviewed the managers of one of our favorite mutual funds, the Delafield Fund. While they are not flashy, they have done a nice job of compounding their fundholder's capital over an extended period of time. I think after you read the article, you will understand why we are big fans of these disciplined investors.
Tuesday, May 19, 2009
Update
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.
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.
• 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
Fairholme
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.
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.
Tuesday, April 14, 2009
Our 1st Quarter Client Letter
“May you live in interesting times.”
- Chinese proverb…and curse
As we complete our first year as Harvest Financial Partners we have thought about that proverb a lot. We have seen largest financial market and home price declines since the 1930s, government intervention in the economy on an unprecedented scale, and the demise or near demise of such financial behemoths as Fannie Mae, AIG, Citigroup, Bear Stearns and Lehman Brothers. Even GE has had to go hat-in-hand to Warren Buffett and use government debt guarantee programs to sell its bonds. Unemployment is fast approaching early 1980s levels, and world trade is declining for the first time in decades. Very interesting times!
A few weeks ago, when we last wrote you, the pessimism and anxiety were at an extreme. People were really nervous and scared. Today, the market is up over 1500 points, and all seems fine. We believe that the reality is somewhere in the middle. There are still many problems with the economy, but the unprecedented level of fiscal and monetary intervention should soon start to have an impact. This will not necessarily put an end to the recession, but it should improve the financial system and benefit other parts of the economy.
So where do we go from here? Well, we are not economic forecasters; rather we are analysts of companies. To our way of thinking, owning stock in a company at a price of $25/share has less risk than owning stock in the same company at $40/share, assuming the fundamentals have not markedly changed. We are finding many more of these “sales” in the market and, as investors that gets us very excited. We have talked often about the need to upgrade quality and focus on dividends, and we continue to believe that makes sense for investors. We have talked often about patience, and while it has been seriously tested, we still believe this is the correct course of action. So we will continue to proceed with your investment plan. We still are comfortable that this approach will yield you attractive returns over time.
To see how we are implementing our investment approach, we suggest you periodically visit our blog (there is a link on the website or you can visit it directly at www.plantingforyourfuture.blogspot.com). It contains our thoughts on the markets, investing and some of our favorite stocks.
In closing, another quote, “It was the best of times; it was the worst of times”. Even with the worst financial markets in decades we have loved every moment of building Harvest Financial Partners. Most importantly we have enjoyed getting to know you and the rest of our clients. Working with you is why we started the business and what keeps us energized every day. Of course, there are growing pains along the way, so if you have any suggestions or concerns, please let us know.
- Chinese proverb…and curse
As we complete our first year as Harvest Financial Partners we have thought about that proverb a lot. We have seen largest financial market and home price declines since the 1930s, government intervention in the economy on an unprecedented scale, and the demise or near demise of such financial behemoths as Fannie Mae, AIG, Citigroup, Bear Stearns and Lehman Brothers. Even GE has had to go hat-in-hand to Warren Buffett and use government debt guarantee programs to sell its bonds. Unemployment is fast approaching early 1980s levels, and world trade is declining for the first time in decades. Very interesting times!
A few weeks ago, when we last wrote you, the pessimism and anxiety were at an extreme. People were really nervous and scared. Today, the market is up over 1500 points, and all seems fine. We believe that the reality is somewhere in the middle. There are still many problems with the economy, but the unprecedented level of fiscal and monetary intervention should soon start to have an impact. This will not necessarily put an end to the recession, but it should improve the financial system and benefit other parts of the economy.
So where do we go from here? Well, we are not economic forecasters; rather we are analysts of companies. To our way of thinking, owning stock in a company at a price of $25/share has less risk than owning stock in the same company at $40/share, assuming the fundamentals have not markedly changed. We are finding many more of these “sales” in the market and, as investors that gets us very excited. We have talked often about the need to upgrade quality and focus on dividends, and we continue to believe that makes sense for investors. We have talked often about patience, and while it has been seriously tested, we still believe this is the correct course of action. So we will continue to proceed with your investment plan. We still are comfortable that this approach will yield you attractive returns over time.
To see how we are implementing our investment approach, we suggest you periodically visit our blog (there is a link on the website or you can visit it directly at www.plantingforyourfuture.blogspot.com). It contains our thoughts on the markets, investing and some of our favorite stocks.
In closing, another quote, “It was the best of times; it was the worst of times”. Even with the worst financial markets in decades we have loved every moment of building Harvest Financial Partners. Most importantly we have enjoyed getting to know you and the rest of our clients. Working with you is why we started the business and what keeps us energized every day. Of course, there are growing pains along the way, so if you have any suggestions or concerns, please let us know.
Friday, March 27, 2009
Harvest in the Media
We were a resource for this article in the April 2009 issue of Main Line Today dealing with the current market environment. (You will find us quoted starting on page three.) We hope it provides you food for thought.
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