Morningstar Advisor - February/March 2009 - (Page 54) Undiscovered Managers I can’t think of another fund that’s similar in terms of special situation bonds. Gary Schlaffer, financial advisor The Stock Side That said, the fund’s fixed-income stake is unlikely to exceed 60%. Carlson and Fusting are scrutinizing their stock holdings to confirm that there are no big risks, such as excess leverage, and they are deciding whether to buy more as prices plummet. Top stock holding FTI Consulting FCN, in the portfolio since 2003, is certainly well positioned should this economic environment persist: It provides services to companies needing to reorganize, as well as economic consulting. As Carlson jokes, “Their problem is that they can’t hire fast enough.” Of course, Fusting says, “the risk is that their assets walk out the door every day at 5:00.” But FTI has built a strong business that generates a tremendous amount of cash flow, with no capital requirements. Carlson’s confidence in Michael Baker BKR and its engineering-services segment, which is bolstered by a roster of governmentfunded projects, prompted him to add to the position when troubles in the energy business depressed its price. Hedge fund blowups spelled opportunity here, too: Tontine Associates (which liquidated two of its portfolios in November) was the biggest holder of Michael Baker. “When we saw the stocks going down five points in 10 minutes,” Carlson says, “we thought, that must be Tontine. The bottom line is that the company is debt-free, not a penny, a big cash-flow generator, and priced at a very attractive multiple earnings.” Four insurance stocks make up a significant sector stake (8% of assets at the end of September), but Carlson and Fusting say that none has had dangerous levels of exposure to mortgage-backed securities. The largest business of Assurant AIZ is creditor-placed homeowner’s insurance, so foreclosures are good for business. Financially strong reinsurer PartnerRe PRE habitually buys back stock. “We prefer companies that have the luxury of being able to do so,” Carlson says. W.R. Berkley WRB, one of few providers of casualty insurance such as product liability, is reinvesting excess capital, as well as buying back stock. United America Indemnity INDM has also bought back shares. Although the specialty insurer has suffered from recent management turnover, the fund has built its position at a deep discount to book value. As for new purchases, the fund might add some blue chips, given rock-bottom prices. “In the last couple months, we’ve said we may end up owning stocks we never would have had the opportunity to purchase in the past [given our focus on inefficient prices],” Fusting says. “I wouldn’t want to come into the office every day knowing I have to be fully invested in mid-cap value stocks, or any other section of the style box.” Where It Fits the quirky convertible exposure. “I can’t think of another fund that’s similar in terms of special situation bonds.” Schlaffer is not currently directing new money to Greenspring because he is drawn to more dramatic high-yield plays, but “this will remain a core holding for us. For an advisor who does not hold the fund and wants to divert money from Treasuries and blue chips, this is an excellent option,” he says. New shareholders may need to check their expectations once the market heads back up. “We’ve tried for years to educate shareholders about what to expect from us,” Carlson says. “We are defensive and we hope to do better in down markets, but we won’t do as well in up.” Greg Schultz, co-owner of Asset Allocation Advisors in Walnut Creek, Calif., is one relative newcomer (he first bought in 2004) who was drawn to the fact that management is “ever mindful of downside risk,” making the fund an appropriate core holding for his retiree clientele. That said, it’s easy to get excited about the virtually risk-free double-digit yields Greenspring is buying today. Of course, it all depends on Carlson having done his homework right—and his 20-year record at the helm suggests that he has. Although exposure to financials led to a loss in 1998, the fund’s overall record of moderate volatility and category-beating returns justifies Carlson’s unique approach. K Laura Lallos, a former Morningstar analyst and editor, is a frequent contributor to the magazine. The fund’s broad mandate and unusual portfolio may make it difficult to plug neatly into a portfolio segmented along style-box lines, but Greensping’s longtime fans consider it a core holding for a variety of clients. Gary Schlaffer, of Reston Va.-based financialservices firm Alexander Randolph, believes the fund’s value orientation makes it less risky than a traditional 60/40 fund and fitting for more-conservative portfolios. He also uses Greenspring in aggressive portfolios for 54 Morningstar Advisor February/March 2009
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