Macro Guidance, Micro Focus
North Star Opportunity Fund
Eric Kuby, Brad Cohen
Author: Ticker Magazine
Last Update: May 14, 10:01 AM EDT
|Designed for investors seeking a single investment vehicle with adequate diversification, the North Star Opportunity Fund has the flexibility to provide exposure to domestic equities of all sizes and to fixed income. While the fund's equity and sector allocations vary with the macro outlook, its focus on high-quality, out-of-favor companies remains constant. To avoid value traps, portfolio managers Eric Kuby and Brad Cohen assess the catalyst for each undervalued security.
"The primary objective has always been long-term capital appreciation. We seek to achieve this goal through a concentrated portfolio of all cap common stocks and an allocation to fixed-income securities."
Another example is Janus Henderson Group PLC, a global asset management group. We originally bought Janus before its merger with the Henderson Group. At the time the stock of Janus was extremely undervalued. The growth in assets has been disappointing mainly due to competition from ETF products.
We assumed that assets would stabilize and grow as their funds performed better. Janus also had negative performance fees that were depressing the earnings for four or five years. We knew that trend would be reversed and that was a good catalyst. The next catalyst was their merger with the Henderson Group, which broaden the distribution as well as the scope of their funds. The fund has started to perform better, and better performance attracts assets. So, the story played out exactly as we had expected.
Q: What is your portfolio construction process?
Currently, we invest about 80% of the fund in equities. If our equity allocation falls below 70%, that means that we are particularly concerned about the market. An equity allocation of over 90% signals that we are exceptionally bullish. In term of individual stocks, our exposure typically is 1% to 3% of the fund. An investment of 4% of the portfolio would mean that we have extraordinary confidence in that security.
Our sector exposure depends on our macro view of the economy and the stock market. As a result, we gravitate towards certain sectors or type of companies at different times. We look for the sectors and the companies that we believe are best, based on what's going on in the world and the economies at the time. Our turnover is typically quite low.
Defining the right benchmark for the fund is difficult because of our investment style. When we have an aggressive allocation, we may look like an aggressive equity fund. Often, we are compared to the S&P 500, which might make sense over the long-run, but in the short-run is not a very good benchmark.
Q: How do you define and control risk?
We accept the inherent risk of owning stocks, where there is no maturity date, coupon, or guarantee. We view volatility as a risk and we believe that most of the volatility is created by trading firms. That's the unfortunate part of the landscape and we can't do much to control it.
We control risk by focusing on companies with the highest quality, best balance sheets and management teams. In other words, we believe that investing in well-run and high-quality businesses with prudent balance sheet is the best way to minimize risk. These are lessons that we learned in the financial crisis.
We watch a couple of indicators to see if the overall environment might be deteriorating and we decide the equity and the sector allocation on that basis. We specifically look at the St. Louis Fed Financial Stress Index to see if there is actual stress in the system. When the market went down 10% in late February, after a week that index showed that there wasn't really that much stress in the system. In such cases we would be less inclined to change our allocation.
Another gauge that we watch is the U.S. dollar. The fact that the dollar has been weakening recently gave us a reason to become more cautious. We have been moving out of some financials and more into consumer staple stocks, which have less inherent risk.
Diversification is another risk control measure. A great way to minimize risk is not to let any positions to dominate the fund.
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