How Three Funds Tried to Turn Back the Tide
By TIM GRAY
STOCKS sank in nearly every corner of the market in the third quarter. The major American and European indexes? Down. Emerging markets like Brazil, Russia, India and China? Also down.
But managers of several of the quarter’s better-performing funds found ways to protect their shareholders from the full pain of the slump, even when they didn’t eke out gains. These managers sought out typical havens, like discount retailers and gold stocks, and less common ones, like short sales.
Stretching the Dollar
Tough economic times led Charles T. Akre Jr., manager of the Akre Focus fund, to discounters like Dollar Tree, Ross Stores and the TJX Companies, owner of T. J. Maxx and Marshalls.
“Businesses that help consumers stretch the dollar are a great place to be right now,” he said. These three companies, which throw off lots of cash, should keep thriving even when the economy gains momentum, he said. Shares in the retailers recently accounted for about a quarter of the fund’s assets.
Mr. Akre has led this fund for two years. Until starting Akre Focus, he oversaw FBR Focus, where he had a reputation for betting big on favorite ideas. His approach hasn’t changed. Akre Focus owned shares in 22 companies at the end of June, compared with 164 for the average domestic stock fund tracked by Morningstar.
Mr. Akre will hold companies’ shares for years. His current turnover ratio, 25 percent, equates to an average holding period of four years and compares with a ratio of 85 percent for the average domestic stock fund followed by Morningstar. Two holdings — Markel, a Virginia insurer, and Penn National Gaming, a casino owner — were also longtime investments of FBR Focus.
“I’ve owned Penn Gaming for more than 10 years,” he said. Akre Focus holds less of the stock than had been typical for him because he’s worried about the economy’s impact on gambling. “The consumer is constrained by employment and credit worries, and visits to casinos are down,” he said.
In the third quarter, Akre Focus’s institutional shares, with an expense ratio of 1.24 percent, lost 6.7 percent, while the Standard & Poor’s 500-stock index fell 14.3 percent, including dividends.
The Long and Short of It
Unlike Mr. Akre, Michael B. Orkin, manager of the Caldwell & Orkin Market Opportunity fund, sells stocks short in addition to buying shares and socking them away in hopes of seeing appreciation. Mr. Orkin says he tries to provide greater risk protection than the average stock mutual fund, guarding his shareholders against what he calls “stomach churn” — the anxiety that comes from bear markets and collapsing stock prices.
“We manage for risk, not just return,” he said. “So there are times when the markets will run up profusely, and we’ll be negative. That’s part of the cost of how we do things.”
Short-selling is a way to make money from declining share prices. A short-seller like Mr. Orkin borrows a stock and then sells it. Later, when he must return the borrowed shares to the lender, he has to buy them. If the price has fallen, he profits. But if it has risen, he loses.
Lately, Mr. Orkin’s fund has shorted European banks, which have been hurt by the European Union’s debt crisis. With government-funded student loans under pressure, he’s also shorted for-profit education companies like the Apollo Group, which owns the University of Phoenix.
“Because the markets have been down, our winners have been mostly related to the short side,” he said.
Mr. Orkin makes long bets, too. Apple was a recent one. He said he was troubled by the death on Wednesday of Steve Jobs, Apple’s visionary leader. “But when you have a company of this quality, with its product flow and invention stream, that’s pretty incredible,” he said. Despite a sputtering economy, Apple’s sales and earnings have continued to grow, Mr. Orkin said.
In the third quarter, the fund returned 3.1 percent. Its expense ratio is 1.19 percent.
A Shield of Gold
Gold is a popular haven; investors often flee to it and other precious metals in troublesome times. Thus gold prices have soared over the last several years, as the world has endured one crisis after another.
Dan Denbow, co-manager of the USAA Precious Metals and Minerals fund, says he doesn’t spend much time fretting about the price of gold bullion and bars. He and his co-manager, Mark W. Johnson, welcome its climbs, as those help the companies the fund. But the two managers are trying to find good stocks, not foretell gyrations in metal prices, Mr. Denbow said.
“We’re in the mining-finance business, not the gold-price prediction business,” he said. “We only invest in the miners themselves. We don’t invest in the commodity.”
Mr. Denbow’s fund also buys stock in silver and platinum miners, but the bulk of its companies concentrate on unearthing gold. He and Mr. Johnston diversify their holdings by geography as well as by company size and maturity. They’ll own industry stalwarts, like Barrick Gold and Newmont Mining, as well as smaller, more speculative names.
In the third quarter, two of their better performers were lesser-known companies digging in the developing world: Yamana Gold owns mines in Central and South America, while Eldorado Gold operates in China and Turkey.
“Yamana really struggled a couple of years ago in terms of operating results,” Mr. Denbow said. “But they refocused and sold off some tougher assets, and now they’re delivering on their numbers.”
Not every developing market pays off, of course. Mining is a risky business, and pursuing it in developing locales can redouble the perils. Another USAA holding, Centamin Egypt, fell in the third quarter as a result of the turbulence in parts of the Arab world.
“People are concerned about the change in Egypt’s government,” Mr. Denbow said. “It became difficult for the company to even get blasting materials. When a country is going through upheaval, you don’t want trucks full of blasting equipment driving around.”
The fund, with an expense ratio of 1.15 percent, lost 2.4 percent in the third quarter.
"For when the One Great Scorer comes
To write against your name,
He marks-not that you won or lost-
But how you played the game."
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