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| | Mutual Funds
A farmer's patience grows a sturdy fund
Jeff Auxier has quietly put together a solid track record even as the market has suffered. Heres how his Focus fund limits risk and finds value where others forget to look.
By Timothy Middleton
The sudden tumult in financial markets is burying investors in noise rather than information. The economic recovery is jobless, but Americans are buying homes at a record pace. Mutual fund inflows are soaring, but the Nasdaq is sliding. Low-yielding bonds find a buyer mainly at Japans central bank, desperately trying to stem the dollars fall.
Meanwhile, a hazelnut farmer in Oregon is harvesting gains that would seem humble, except theyre holding up as solidly as, well, a tree. Jeff Auxier runs a Morningstar five-star fund that has fewer millions in assets than he has acres on the Molalla River south of Portland.
Basically, we want a large margin of safety when we invest, says the manager of Auxier Focus (AUXFX), a large-capitalization value fund that over the last three years has outperformed such rivals as Sequoia (SEQUX) and Dodge & Cox Stock (DODGX), both of which are closed to new investors.
With only about $49 million of assets, Auxier is far from closing. The founding manager is one of the funds largest shareholders, and he has obligated himself not to sell a share so long as hes running the portfolio. A youthful 45 obsessed with the work ethic, hence the farm, Auxier is far from retiring.
But hes also far from rash. Morningstar analyst Lynn Russell in a recent report described him as waiting patiently for a stock he likes to drop to the price he wants to pay.
Creativity pays off
Until it does, hes content to hold cash, bonds or preferred stock, or to play special situations where, he says, we dont (have) to depend on the stock market to make money. One such investment currently is a merger arbitrage in shares of AT&T Wireless (AWE, news, msgs), which is being taken over at $15 but trades around $13.50.
Periods of uncertainty like the current one draw attention to managers who can be creative, and Auxier can. The manager made his name, which is pronounced OX-sher, in the late 1990s when he twice won a Money magazine stock-picking contest, but today only about two-thirds of his assets are long-term bets on stocks.
Auxier won the contest while a broker for Smith Barney. He started his namesake fund in July 1999 and soon began defying the bear market, beating the S&P 500 Index ($INX) by double digits in 2000, 2001 and 2002. In last years bull market, the fund advanced 26.8%, trailing a majority of its rivals because it remained defensive.
So far this year, the fund is up about 1.3% while the S&P 500 is flat.
A strong work ethic
Focus in the funds name doesn't refer to a concentrated portfolio. Auxier owns scores of positions and no more than 25% of assets are riding on the top 10 names. The largest position currently is cash, at about 15% of assets.
We believe all achievement comes from focus, so were focused on this fund, Auxier says. A slave to market hours three time zones to his east, he gets up even earlier to tend his 58 acres of timber and nut trees.
Our valley grows 98% of the U.S. hazelnut crop, he says. He harvests about 20 tons of them while devoting most of his land, 18 miles from Portland, to timber and a homestead for his wife and four children, the oldest 10.
We want our kids to have a work ethic, he says. Theyre seeing hard work all the time. When you compare work on a farm to going through (corporate 10-K filings), believe me, the 10-Ks are so much easier than planting trees.
Spotting value that others miss
But its the 10-K work that benefits his investors, and he does it assiduously. His core portfolio consists of companies with plenty of cash flow that find themselves out of favor. One home run in recent years was Guidant (GDT, news, msgs), which the fund bought around $30 a share.
Trading now around $70, Guidant has shaken off the markets fears that it couldnt compete against giants like Johnson & Johnson (JNJ, news, msgs). They are the most focused company on the heart in the entire industry, better than Johnson & Johnson and Boston Scientific (BSX, news, msgs) and Medtronic (MDT, news, msgs), he says.
Auxier makes multiyear investments only in companies with sound businesses and balance sheets and superior management. The funds turnover of 50% is about half the norm at similar funds, and it is so high only because the manager is willing to commit significant assets to more opportunistic bets, which unfold in months rather than years.
Two years ago, for example, the fund invested heavily in Canadian government bonds as a play on the U.S. dollar, which Auxier thought was overvalued at the time. Those bonds subsequently leaped nearly 50% as the greenback weakened and the Canadian dollar surged.
A long-term strategy
But the majority of assets are locked up for years in more strategic bets. One such currently is First Health Group (FHCC, news, msgs), which is trading at 14 times forecast earnings because of uncertainty about the nations health care future.
First Health is a leader in managed care, which Auxier is betting will benefit from whatever reforms are adopted. He expects earnings to rise substantially and the price-to-earnings ratio to return to its historical norm above 20.
Meanwhile, First Health has bought back one-third of its capital stock in the last decade. We like businesses that drown in cash, have a lot of free cash flow and a management team that can allocate that free cash, he says.
Because of Auxiers focus on limiting risk, and his use of alternatives such as bonds, his fund displays about one-third less volatility than rival equity funds, which limits its upside in bull markets. Because of its small size, its expense ratio of 1.35% is about one-third higher than I like to pay for a big-cap fund. And because of the funds youth, it lacks a lengthy performance record.
But it's already winning plaudits from financial advisers. Steven Rog, an associate in R.W. Rog & Co. in Bohemia, N.Y., says, This fund is a perfect fit for a more conservative investor.
More conservative is the natural way to feel when markets are stormy, but its also not a bad place to be in the second year after a bear market ends, when small and Nasdaq ($COMPX) stocks have run out of steam and leadership traditionally passes to mature large companies.
And when it comes to patience, who has more than a tree farmer?
At the time of publication, Timothy Middleton owned the following securities mentioned in this article: Dodge & Cox Stock.
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