Morningstar Advisor - February/March 2009 - 53

This market is certainly challenging, but every day, we are improving the portfolio. Chip Carlson portfolio is in bonds of companies that could write a check to cover their total debt now if they wanted to. Whether the Washington bailout succeeds isn’t going to affect these investments.” Fusting adds, “With a bond that’s due in a year, you don’t have to have as much insight 16000 into the future as you do with one due in 10. And at least 90% of the bonds in the portfolio are the next bond or two to mature in the 13000 company’s capital structure. If the company has bank financing, it is due after the bond.” In other words, these companies can pay back the debt Greenspring holds whether or not they have access to increasingly scarce credit. Advisor Drew Tignanelli, president of Hunt Valley, Md.-based Financial Consulate, who has invested with Greenspring for a decade, agrees. “Their strategy is the right way to go. These are corporations with clean balance sheets, companies that can pay their debt even in dire times. You can get 10% to 17% yields as other institutions liquidate, and Greenspring has a tremendous opportunity: It is small enough that it can take advantage of a $10 million bond.” Size isn’t the $277 million fund’s only advantage. Carlson and Fusting are grateful that they have had money to spend. Even as some funds have had to sell across the board to meet redemptions, Greenspring’s loyal advisors and shareholders have contributed net inflows. This base includes Neil Paolella, president of Arbor Asset Management in Ann Arbor, Mich. Although Paolella pulled most of his clients substantially out of stocks in June, he did not 10000 sell Greenspring. “This is the only fund with stock exposure that I didn’t sell, which tells you how I feel. Their strategy today is a huge winner, and I’m buying more and expect to do so over the next couple of months.” Riding Convertibles Chip Carlson Carlson and Fusting aren’t veering into uncharted territory. The fund has never held the standard assortment of large-cap stocks and Treasuries that the typical moderateallocation fund holds. The aim is to unearth value in inefficient sectors, which has meant primarily small-cap value stocks for the equity half of the portfolio and corporate and convertible bonds on the fixed-income side. “We don’t buy Treasuries,” Fusting says. “We never have. We want diamonds in the rough, just like our stocks, and the goal is to get an equitylike return.” Sepracor, Inc. convertibles, which the fund has bought and sold for years, exemplify the fund’s opportunities today. Sepracor has a hit product in sleep-aid Lunesta and a sparkling balance sheet with more than $1 billion in cash. “During October, some convertible hedge funds had margin calls going out all over the place and people were just blowing some of these bonds out,” Carlson says. “We bought bonds with an October 2009 put at up to 18% yields because someone needed to get out in a hurry. There is no concern on our part whether Sepracor can pay these bonds. There is a saying to the effect that ‘the margin clerk doesn’t know P/E.’ Well, he doesn’t know yield-to-put either!” Digital River convertibles, new to the portfolio in September, provided a similar opportunity. The software company also has more in cash Greenspring GRSPX $16K DJ Moderate Portfolio 13 04 05 06 07 08 09 Category Moderate Allocation Morningstar Rating Expense Ratio (%) 1.03 5-Yr Anl Total Rtn (%) 3.87 5-Yr Anl TR % Rank Cat 2 QQQQQ Minimum Investment $2,000 Data as of Dec. 31, 2008. than debt, and its bonds were trading at par until the stock plunged with the market. Jan-04 fund was able to get Jan-07yieldsJan-08bonds Jan-06 Jan-09 The Jan-05 fat on puttable in January 2009. Similarly, Fusting Feb-04Jul-04 Mar-04 Sep-04 May-05 Nov-05 May-06 Feb-07Jul-07 Feb-08Jul-08Dec-08 Apr-04 Oct-04 Jun-05 Feb-06Jul-06 Mar-07 Sep-07 Mar-08 Sep-08 May-04 Nov-04 Jul-05 Mar-06 Sep-06 Apr-07 Jun-04 Aug-04 Aug-05 Apr-06 Sep-05 Jun-06 Oct-05 Aug-06 May-07 Jun-07 Aug-07 Apr-08 Oct-08 May-08 Nov-08 Jun-08 Aug-08 says, Dec-04bonds were trading at Oct-07 CITApr-05 Dec-05 Oct-06 “ridiculous Feb-05 Mar-05 Nov-06 Dec-06 Nov-07 Dec-07 yields for bonds that will mature in 2008.” With such opportunities as these, Greenspring is now tilting toward bonds. “There are tremendous stock values today, but the risk is that they will be even more undervalued tomorrow,” Carlson says. “With an undervalued bond, the risk is diminished because you will realize your return if you did your homework right and the company pays the bond off at maturity or at the put date. You don’t need Mr. Market to agree with you.” MorningstarAdvisor.com 53

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Morningstar Advisor - February/March 2009

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