Managers’ cash weighting drops along with market

For some portfolio managers, the upside of all the recent market turmoil is that almost everything suddenly looks cheap.

“We have been deploying the cash we had on hand over the past few quarters,” said Dave Carlsen, one of three portfolio managers responsible for the $110 million Buffalo USA Global Fund (BUFGX).

The fund had a 10% cash weighting at the end of June, and the cash position was expanded to 15% during most of the third quarter.

The cash weighting is now below where it was in June, said Mr. Carlsen, who manages the fund along with Clay Brethour and Kent Gasaway at Kornitzer Capital Management, a Mission, Kan.-based firm with $5 billion under management.

The Buffalo fund was launched in 1995 and has been managed by this team for the past three years.

“The stock market’s pullback has provided us with some great opportunities,” said Mr. Brethour.

The basic strategy of the fund is to expose investors to global markets and specific components of economic growth and expansion by investing exclusively in U.S.-based companies that are working and investing in those markets.

The management team concentrates on those companies that generate at least 40% of their revenue from non-U.S. sources. “We are looking for companies that are leveraged to our thesis and that exhibit a strong and sustainable competitive advantage,” Mr. Carlsen said.

The portfolio is relatively concentrated, with fewer than 55 positions. Each position is maintained at a weighting of between 1.5% and 3%.

Annual portfolio turnover, which historically has been about 30%, is likely to be higher this year due to investment opportunities that have come up as a result of the market’s dramatic downturn, according to Mr. Carlsen.

Part of the rationale behind tapping domestic companies for international exposure is to reduce some of the risk associated with foreign markets, he said.

“We’re looking for U.S. companies that are capitalizing on the global growth,” Mr. Carlsen said. “We can invest in emerging markets, for example, with the safety of U.S. companies.”

In terms of buying into the market at this point, Mr. Carlsen said, “This is the time to focus on buying high-quality companies at good prices; we know that eventually, the markets will normalize.”

While the fund’s performance has been hampered lately along with the global equity markets, the strategy has received high marks from Morningstar Inc. of Chicago. The fund has a five-star rating in Morningstar’s large-cap-growth category.

Through Thursday, the fund was down 29.5% year-to-date. That compares with a category average decline of 37.3%

The Standard & Poor’s 500 stock index was down 35.5% during the same period.

Historically, the fund focused primarily on growth in the developed world, but that focus has expanded to some emerging markets this year. “This isn’t a complete departure for the fund, because many of the old themes are still in play,” Morningstar fund analyst Miriam Sjoblom noted in a July review of the fund.

“Although this capable team is now casting a wider thematic net, we still question the restriction that only allows the fund to invest in U.S.-based companies.”

Ms. Sjoblom didn’t return calls seeking a follow-up comment, but nothing has changed in the fund’s strategy since her last write-up, in July.

The fund’s management team said 55% of the total revenue generated by the portfolio’s holdings came from international sources.

As Mr. Carlsen said, there are investment opportunities in both developed and emerging markets that can be accessed through select U.S. companies.

“In developing markets, there is industrial development and manufacturing,” he said. “And then that leads to an emerging middle class and an upper class that leads to consumerism.”

One of the steady examples of consumerism that seems to transcend borders, languages and economies is Oak Brook, Ill.-based McDonald’s Corp. (MCD).

Shares of McDonald’s closed at $54
Friday, down 6.5% year-to-date.

The energy sector is a major consideration in any theme that involves growth in developing markets, which essentially is the case for Chart Industries Inc. (GTLS).

The Garfield Heights, Ohio-based company makes equipment that compresses natural gas for transport. The company’s stock closed at $19.17
Friday, down 37.9% from the start of the year.

Questions? Observations? Stock tips? E-mail Jeff Benjamin at [email protected].