MONEYLETTER.com
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1 year, 24 issues, $150.
Brandywine Advisors & Blue topping their peers
Walter Frank: "In the last issue of Moneyletter, we profiled the strategies of Friess Associates, the investment shop behind the Brandywine Funds. As detailed in that issue, the Brandywine team utilizes "exhaustive" bottom-up research to select its investments in firms that will beat Wall Street earnings expectations. It follows, then that the funds' portfolio characteristics, including sector allocation, derive from stock pricking. Sometimes, that means that the Brandywine funds end up tilted heavily toward one or two sectors.
As of June 30, the three Brandywine funds, collectively, were heavily weighted in energy stocks. In a report to investors on June 30, portfolio manager and firm CEO Bill D'Alonzo, noted that "nearly one in five companies we hold firm-wide hails from the energy sector." But he quickly added, "Still, that commitment doesn't hinge on a specific oil-price target." Rather, he sees high oil prices as encouraging exploration and production activity, "creating strong demand and earnings-growth potential."
In a broader perspective, D'Alonzo noted at the end of August that the potential for energy to take the wind out of the economy's sails is a significant investor concern. He also opined that broad economic measures are offering mixed signals. However, the Brandywine team continues to find "ample earnings strength at reasonable prices." And if that's true, the two funds profiled below should continue on their recent winning paths.
Brandywine Advisors (BWAFX): This mid-cap fund targets growing companies with market capitalizations between $1 billion and $15 billion. Note: this fund cannot be purchased directly from Brandywine - it is only available through financial intermediaries and carries a 0.25% 12b-1 fee for distribution and shareholder services.
Holding true to the Brandywine investment style, Brandywine Advisors targets fast growth companies with reasonable valuations. The fund holds only 43 stocks in its portfolio and sports a rapid portfolio turnover of 269%. Since its inception in October 2000, its calendar year results have been mixed. It fell about in the middle of Morningstar's mid-cap growth pack in its first full year of operation, turned around to place in the top 12% in 2002, only to lag in the following two years. A lack of technology stocks would explain the shortfall in 2003. But 2005 is a different story. As of September 16, its year-to-date return of 17.3% puts it in the top 1% of its fund group, as does its trailing one-year return of 33.2%.
To be sure, the heavy portfolio emphasis on energy has been a plus, though homebuilders and select consumer-related holdings have aided results as well. The single largest contributor to fund results this year has been Southwestern Energy, followed closely by top holding Chesapeake Energy, up 147% and 106%, respectively. Other energy firms contributing to results include National Oilwell Varco (up 80%), Weatherford International, and Nabors Industries.
Meanwhile, homebuilders KB Home and Centex Corp. advanced on better-than-expected earnings. Additionally, seventh largest holding Goodrich is ahead by more than 38%. The firm is the world's largest supplier of components, systems, and services to the aviation market. Following a lull in business after the 2001 terrorist attack, it is benefiting from increasing aftermarket sales and orders associated with next-generation aircraft.
Brandywine Blue (BLUEX): As its name suggests, Brandywine Blue applies the Brandywine investment program to large-cap stocks, with market capitalizations of more than $6 billion. The fund, however, rarely holds "mega-cap" stocks such as the General Motors, Wal-Marts, and IBMs of the world. In explanation, D'Alonzo says that these mega-caps are usually growing too slowly for their liking, and are so heavily followed by analysts that it is difficult to get that information edge that is critical to their strategy. Instead, Brandywine Blue focuses on the lower end of the large-cap spectrum. Like its siblings, it holds a relatively small number of stocks (32) and has a high turnover (247%).
Brandywine Blue has been a notable success in the large-cap sector, especially considering that the segment tends to be much more efficiently priced than the small-, or even mid-cap universes. Over the past six full calendar years, it fell below the average only once, in 2001. And in the even years, 2000, 2002, and 2004, it ranked within the top 5% of the Morningstar's large-cap growth group.
Unlike Brandywine Fund and Brandywine Advisors, energy stocks played a less important roll in Blue's good results. Instead homebuilders (Pulte Homes and Centrex), consumer related stocks (Nordstrom and Nike), and Chicago Mercantile Exchange and Corning drove results. Still, Chesapeake Energy, the 11th largest holding certainly contributed.
Corning, up 72% for the year-to-date through September 16, more than doubled its March quarter earnings. It is benefiting as a major supplier to manufacturers of flat panel television and computer screens. Chicago Mercantile (ahead by 37%), meanwhile, is enjoying increasing volumes and its first price increase in five years."
THE NO-LOAD FUND INVESTOR
P.O. Box 3029, Brentwood, TN 37024.
Monthly, 1 year, $139. www.noloadfundinvestor.com.
Mark Salzinger: "Once again, a money-management firm has cheated its investors.
The latest case involves a hedge-fund manager, Bayou Management, whose principals have disappeared (one left a suicide note). About $100 million of client assets appears to be accounted for, with hundreds of millions more unaccounted for.
This is not a case of crooks preying on unsophisticated amateurs. Bayou's investors included at least three sophisticated institutional investors. Sophisticated hedge-fund consultants directed investors to Bayou. It's likely that these firms did considerable analysis and investigation before getting involved with Bayou. Yet, they were taken. Federal prosecutors now say the fraud began in 1998.
There is only one foolproof defense against fraud: diversification. Don't ever put too much of your assets in one stock or with one investment manager.
The mutual-fund world doesn't have a completely clean record either. A number of years ago, shareholders in the American Heritage fund took a big hit because of fraud in one stock that accounted for more than 20% of the fund's assets. More recently, several fund families were tarnished by preferential trading and after-hours purchasing.
Nevertheless, the mutual-fund world, which is heavily regulated, is perhaps the cleanest corner of the investment universe. Surely, it's less subject to fraud than any alternative investments you might consider. That's primarily because the funds don't hold your money. It's held by custodian banks.
If an adviser or financial marketer asks you to consider hedge funds or other alternative investments, investigate carefully before buying. But even if it looks ethical and potentially profitable, invest no more than a few percentage points of your financial assets. Investing more in these murky areas is too risky.
Your Advantage. The Wall Street Journal and The New York Times no longer provide daily print coverage in their price tables to funds with less than $200 million assets. By comparison, this makes our newsletter, The No-Load Fund Investor, even more valuable. Our coverage encompasses nearly 1,000 no-load funds, some of which have less than even $100 million in assets. We cover such small funds for two reasons. First, little investor interest is not a sign of poor investment performance, particularly in the case of new funds. In the cluttered mutual-fund world, it's not always easy even for a good fund to get noticed. Second, many funds provide their best performance when they are small and flexible, qualities from which we want you to benefit. We've added some of our most successful Best Buys selections when the funds had less than $200 million in assets."
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