Book value of the company is still decreasing and in my estimate it will keep decreasing for a foreseeable time. If interest rates continue to rise, the unit sales are going to continue to go down and fixed infrastructure cost will drag down the book value. Before they can get back to normalized earnings we need to have a normalized housing market and until we do that homebuilders are not a value. Toll Brothers in my estimate does not offer value above a $23 price.

Q:  Where do you stand in terms of asset size in the fund and fee structure?

A: We are small but growing – we have $11 million under management. We fixed our costs to not be higher than 1.2% on the mutual fund side. Once we get to $100 million then the expense ratio would be about 0.94%. At some point I will reduce my management fee as well because I want it to be less than 0.9% and reduce it further to 0.6% as the assets grow above $400 million.

Q:  Does your portfolio have stocks and bonds?

A: We are a balanced fund. Currently we are 70% based in equity and 30% in bonds. I have been as low as 53% equity but I don’t foresee currently getting back to that position.

Q:  What kind of bonds do you invest in?

A: I do believe that there is some money to be made in the bond market at certain levels, but over the long haul I still believe the equities are going to provide the key to any portfolio. So I use the bond portion as an anchoring in terms of stable returns. And I use equity to get the alpha and that’s how we create the value in the marketplace for the investors.

I try to structure my own deals on reverse convertible notes. I’ll take a reverse convertible note which has a put feature and trades like a short-term note. I’ll take short-term notes on stocks that I understand and would not mind owning in the future. If the stock is put to me, it will be at a price I like and if not, then I should make a solid 8%-12% return.

Reverse convertible notes are about 19% of my portfo, my current yield to maturity is about 7.28% but I’m also sitting on about 1¾% in unrealized gains. I understand that sometimes these products are expensive because of the underwriter fees but I believe the rates of return justify the incremental cost.

The part of my bond portfolio that has not performed very well is treasuries. I’ve taken a position in 20-year treasuries which probably was a little more aggressive than normal because I thought the 10-year was going to slip to around 4.2% to 4.3% form a technical standpoint looking at my bonds. It moved against me so I’ve lost ¾ of a percent of the overall return in the portfolio, but that happens. Now I am looking for a rally in the bond market to move potentially out of that position and into a shorter duration because I think long term rates will continue to trend higher. Although, from a political standpoint our government has a unique ability to want to keep inflation ultimately low. The government takes the largest hit if rates go up.

Q: Does the bond market exposure require you to have a view on inflation, interest rates and the general macroeconomic trends in the U.S.?

A: From a stock perspective I’m not a chartist, I’m a fundamentalist. And on the bond portfolio I use charts a lot more. For instance I recently charted the P/E ratio of the S&P 500 to yield on 10-year treasuries and I try to look at correlation or inverse relationships and tr y to see historically what the bond market did at this point in time.

I think that there is overall inflation in the global economy. I think there’s a real problem in the U.S. as far as inflation in certain sectors (Food and Energy) is concerned. There is deflation in some sectors and inflation in others and I believe that’s normal. But one area that concerns me is the whole food and energy areas because that’s the main part of the consumption of all families. The CPI basket shows that 20% of our expenditures are in the food and energy but for 60% of the families in America that food and energy basket makes up closer to 50% or maybe even higher.

Q: What kinds of risk do you monitor and what do you do to mitigate them?

A: I actually watch my risk very intently and I like to see our portfolio have a beta of anywhere from 0.60% to 0.80%, which is significantly lower than the market. Modern portfolio theory tells us that beta is just a measure of volatility overtime and amazingly enough risk is reduced the longer you hold the stock. I’m more concerned and I also look at our alpha, the measure of our performance relative to our risk versus the benchmark. I tr y to focus on the risk and tr y to look at the stocks that I think perform admirably while taking less risk as well. That’s why stocks like Johnson & Johnson are the main thrusts of my portfolio.

There is safety in large caps but I won’t say that I wouldn’t invest in small and mid-cap companies if I believe that such investments provide opportunities for better returns. Sometimes a stock is classified as a large cap growth stock and it may have a higher beta but depending on where it’s trading and depending on the future outlook, in my book it can be a relatively low risk investment.