S&P 500 2,441.20 17.28
Gold$1,224.80 $5.30
Nasdaq 6,253.81 61.92
Crude Oil $60,490.00      $-1570.00
Selectively Balanced in Smaller Caps and Corporate Bonds
Villere Balanced Fund
Interview with: Sandy Villere, III

Author: Ticker Magazine
Last Update: Feb 27, 11:44 AM EST
Traditionally balanced funds are diversified among well-known large-cap stocks and U.S. Treasuries, with a more of a risk-averse investment style. Portfolio manager Sandy Villere explains how the Villere Balanced Fund prefers to concentrate on faster-growing stocks trading at reasonable valuations, and diversify in select corporate bonds.


“Our balanced fund generally has between 60% and 70% in stocks and 25% to 40% in bonds. We offer active management, concentrating on just 20 to 25 securities based on our best ideas, rather than diversifying into every sector, globally.”
Q: Have major big-box and online players like Walmart and Amazon impacted POOLCORP’s business?

A: This was a big concern maybe 10 years ago, but while they said Amazon was one of their biggest competitors, they’re also one of their biggest customers—they supply Amazon’s demand. So one way or another, even if a customer buys from Walmart or Amazon, POOLCORP has their hand in it.

Notably, there are a lot of things that people won’t buy through Amazon—they’d rather go to their pool company. Even the do-it-yourselfers who repair and re-plaster their swimming pools end up sourcing supplies from their pool company. So, while there’s some part of their business that might have some margin exposure, e.g., chlorine, in general it hasn’t really impacted them and arguably helped their business by expanding its customer base.

Q: Do you have any specific portfolio construction strategy?

A: In stocks, if we’re particularly optimistic about the market, our holdings are closer to 70%, down to 60% if we’re pessimistic. Last summer, a lot of our stocks exceeded where we thought their valuation should be, so we raised cash to about 12%, but then invested about 50% of it between Christmas Eve and New Year’s, when the market sold off pretty sharply.

We’re strictly valuation driven, so when stocks are cheap, we’ll invest more money, and when they’re expensive, we’ll take profits and pare back our stock weightings.

Q: Do you have a certain band that you like to stay within in your equity allocation?

A: We state in our prospectus that we basically remain above 60%. We never try to time the market. In general, when things are expensive, we sell and take advantage of strength, and when things are cheap, we take advantage of weakness, staying within that band of 60% to 70%. I would say about 61% is the lowest we’ve been.

Q: What are your bond investment guidelines?

A: We stay within 25% to 40% in fixed income. We don’t buy U.S. Treasuries, as they’re way too safe. We’d rather take some risk and get some reward, and don’t mind taking some risk when it is a risk we know we are taking. We’ll buy 10% of our fixed-income portfolio in non-investment grade or high-yield bonds to try to improve the yield a little bit.

For example, if we have 25% in fixed income, we might put 2.5% in non-investment grade bonds. We tend to stay shorter in duration than typical funds—basically a three-to-four-year duration. We don’t have too much exposure to fixed income generally, preferring to stay shorter to protect against rising interest rates.

Q: Do you have any benchmark for the fund? What is your portfolio turnover?

A: We tend to use the Bloomberg Barclays US Intermediate Govt/Credit Bond Index as our benchmark, with a six- to seven-year duration. For the entire fund, we use the Lipper Balanced Fund Index, because it consists completely of balanced funds. We show the S&P 500 Index, but it’s not a fair comparison because it’s 100% equities and we have around 25% to 30% in bonds.

Turnover tends to be about five years, so about 20% annually, because we buy for the long run in the stock portfolio. We hold bonds to maturity and are not traders.

Q: Is there a time when your stock analysis leads you to a corporate bond opportunity as well?

A: Yes. For example, one of the bonds that we hold—we own the stock and the bond—is LKQ Corp., a global distributor of vehicle parts, which, although lower quality, we like a lot. We visit management to understand what they’re trying to do and take advantage of a good opportunity that can deliver a little bit more yield even though it’s a bit riskier than the average corporate bond.

When someone wrecks their car, the first thing they do is call their insurance company or body shop, where the fine print says they use like-in-kind parts, which are 20% to 40% cheaper, the type that LKQ supplies, not new or OEM parts. Their business cannot be replicated, making it almost impossible to compete with them over the long run. We like how they dominate their niche in the marketplace. So, not only do we like the stock but we think the bonds will pay us an outsized return on the fixed income side.

Q: How do you define and manage risk?

A: One thing we pay attention to is when a stock gets overvalued. We try to control risk by assessing our companies continuously. For example, if POOLCORP got into something like the auto business, it would raise red flags and we would probably exit.

If there is a period of overvaluations in the market, we can tolerate underperforming for six to nine months, taking profits and getting out of the way as things get overheated and overdone on the upside. Monitoring our businesses closely, and understanding what’s going on within each one, gives us confidence in our portfolio.

  1  2

  More: Mutual Funds Archive

Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc