Morningstar Advisor - Fall 2008 - (Page 59)

Many stock-pickers who are steeled against the vicissitudes of the market might nonetheless shudder at the thought of venturing away from a financial capital on the East Coast. Madison Investment Advisors’ Jay Sekelsky, though, jumped at the chance. On the same day in January 1990 that he received word of a promotion at esteemed Boston-based asset manager Wellington Management Co., he announced that he would depart the firm to work at a 10-person, unproven operation in Madison, Wis., that ran less than $300 million. Moving from one of the epicenters of asset management to a heavily wooded, quiet college town might be difficult for some, but not Sekelsky, who hasn’t looked back since. Learn by Doing Taking Calculated Risks and Avoiding What’s Hot His move from Wellington to Madison Investment Advisors was a risk, but much like the style of investing he had read about in the books of Buffett and Graham, it wasn’t an erratic bet. He had the chance to comanage Madison Mosaic Investors MINVX alongside firm founder Frank Burgess. Sekelsky had high regard for Burgess, who started the firm in 1973 amid one of the worst bear markets in history, a trial by fire that helped shape the firm. “Starting a money management firm in a year when the market drops 40% leads you to build an extra layer of precaution into the investment process,” Sekelsky says. This cautious foundation is evident in Sekelsky’s process. At the Investors fund, which he took over as lead manager in 1995, Sekelsky buys stocks with an upside/downside ratio of 3 to 1 or higher—which means that, based upon his estimates of their intrinsic worth, Sekelsky thinks that his stocks have a much greater potential for price appreciation than for price decline. In addition, the manager only invests in companies that can consistently generate returns on invested capital above their cost of capital and those that can build shareholder value. Sekelsky also requires consistency and predictability of free cash flow, a trait that can be extremely valuable in turbulent times. These strict criteria weed out many stocks in the large-cap stock universe, which until recently, included all companies in the energy sector. Sekelsky had shunned the sector because he didn’t like that most energy companies’ business models rely heavily on commodity prices, which tend to be volatile. He also didn’t like their rich valuation levels and argued that they possessed too much downside risk. As the energy sector tumbled on lower crude-oil prices, however, some stocks have become attractive value plays, Sekelsky says. He scooped up the fund’s sole energy pick, Schlumberger SLB, in September. He likes the fact that Schlumberger is run by Early Believers in Microsoft While getting his MBA at the University of Wisconsin in the late 1980s, Jay Sekelsky helped manage a $125,000 portfolio called the WiscoFund. Although WiscoFund trailed the S&P 500 for the nine-month period of the fund, the team picked up some longtime winners. Here are the fund’s stock holdings on April 30, 1987. The fund had 13.1% of its assets in cash. Stock % of Portfolio Though not a native, Sekelsky called the Badger State home for much of his childhood. And it was there where the manager’s passion for investing firmly took root. Armed with a degree in accounting from the University of Wisconsin-Madison, Sekelsky enrolled in Wisconsin’s renowned Applied Security Analysis Program in 1986. ASAP has produced several high-caliber investment managers, including Bill Nygren of Oakmark, Stephen Petersen of Fidelity, John Smet of Capital Research and Management Co. (advisor to the American Funds), and Foster Friess of Friess Associates (advisor to Brandywine Funds), among others. Sekelsky participated in ASAP’s student-run portfolio-management program. He and a team of comanagers ran a $125,000 real-money portfolio. Their investment goal was to beat the market over a nine-month stretch, the duration of the program. That short time horizon was a struggle for Sekelsky, who had started studying the long-term processes of Warren Buffett, Benjamin Graham, and other investing legends. Nevertheless, he and his classmates had a keen eye for some long-term winners, including Microsoft MSFT. I.M.S. International Lotus Development Microsoft Oshkosh Truck Bowne & Co. Napco Security Systems Saatchi & Saatchi Philip Morris Wyse Technology McDonald’s Fleet Financial Group BSN System Integrators LADD Furniture Nord Resources Boeing 7.0 7.0 6.9 6.1 6.0 5.9 5.7 5.6 5.5 5.3 5.3 4.8 4.7 4.2 3.9 3.0 Source: WiscoFund Annual Report, Apr. 30 1987. great capital allocators and has a durable balance sheet. Sekelksy is dipping his toes in the energy sector, but he is still focused on well-established companies with predictable cash-flow streams in other areas of the market. Moreover, when he buys, he does so for the long haul. Take some of the portfolio’s current picks. Target TGT has had a place in Sekelsky’s portfolio since 1998 when the company was still known as Dayton Hudson. Johnson & Johnson JNJ has been a Sekelsky standby since 1992, when its shares traded at less than $15 per share. A pick Sekelsky recently sold—and one that he has been particularly proud of—is McDonald’s. MorningstarAdvisor.com 59 http://www.MorningstarAdvisor.com

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Morningstar Advisor - Fall 2008 Contents New on MorningstarAdvisor.com Letter from the Editor Contributors Inbox Are You Preparing for Higher Taxes? State of Financials Oracles of Alabama Investment Briefs Managers’ Investment Secrets Revealed Conformity Becomes a Growing Concern at American Gimme Shelter Location, Location, Location Rooted in Buffett, Going for Growth Keeping Little Company Away from the Numbers Consumer Confidence What about Natural Gas? TIPS to Beat Back Inflation Investing in Hidden Assets Funds That Have an Edge Come Tax Time Mutual Fund Analyst Picks 50 Most Popular Equity ETFs Undervalued Stocks Most Popular Variable Annuities New at Morningstar One for You, 19 for Me

Morningstar Advisor - Fall 2008

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