Huber succeeds by looking at the little picture

High-flying fund applies a blend of fundamental and behavioral finance analysis

Dec 17, 2013 @ 12:55 pm

By Jeff Benjamin

Where some portfolio managers might see a big publicly held corporation, Joe Huber sees a smaller individual pieces working for and against the success of the whole.

“We try and think of a corporation as a bunch of companies that make up the corporation,” said the manager of the Huber Capital Equity Income Fund (HULEX).

The fund, which has gained more than 33% from the start of the year, leads the large-cap value category’s five-year average return at 25%, according to Morningstar Inc.

The six-year-old fund has just $60 million under management, but the strategy — and its performance — could start to turn some heads.

For most companies, Mr. Huber applies a blend of fundamental and behavioral finance analysis to capitalize on market patterns where they exist. An example of how his technique of looking at smaller components can be seen in his stake in CNO Financial Group (CNO).

“Even though this might look like a pretty plain-vanilla company, [it’s return on equity] is growing massively because of an internal shift,” Mr. Huber said.

While some analysts might look at CNO and see a company that is 60% made up of a money-losing long-term-care insurance business, Mr. Huber is focused on the company’s shift out of long-term-care and toward two profitable business lines: term life and Medicare supplemental insurance. CNO has a 10-year plan to shed the long-term-care business gradually, reducing the company’s exposure to the money loser by about 6% a year. The resources from that roll-down are being funneled back to the other profitable business lines and toward stock repurchases.

To Mr. Huber, this all adds up to an internal return on equity engine that has fuel for at least the next decade.

The life insurance category is clearly hot, having gained more than 35% this year. CNO is up more than 82% over the same period.

Insurance companies also play a role in Mr. Huber’s strategy for gaining exposure to the banking sector without actually owning any banks and taking on the leverage risk that comes with such financial institutions.

“The last few years we’ve had a dearth of banks in our portfolios,” he said. “It is the cheapest industry, but it’s also the most risky because they take on the most leverage that is backed by unstable assets.”

To get around that leverage risk, he owns insurance company stocks that have less leverage but balance sheets that are loaded with high-quality corporate bonds, similar to bank balance sheets. For the yield curve exposure that banks provide, Mr. Huber owns guaranteed lending companies, such as Sallie Mae. Homebuilder stocks provide the proxy for the real estate exposure that typically comes with a bank stock.

“We’re getting the factor exposure from banks without all the risk associated with banks,” Mr. Huber said. “These proxies have kept up well with banks over the past two years and they provided us protection during 2011, which was a bad year for banks.”

The behavioral finance aspect of the research is best exemplified in the case of Herbalife (HLF), a producer and marketer of health supplements that is waging a nasty battle with hedge fund manager Bill Ackman.

Mr. Huber said he didn’t agree with all the criticism of the company but he did appreciate all the information that was laid out in the public debates because it told him a lot of portfolio managers would dump the stock before the end of 2012 to avoid having it showing up on public documents for shareholders to see.

“Even if they liked the stock, we knew portfolio managers would be selling it by Dec. 31 [2012] because they didn’t want to have to explain to shareholders why they owned it,” Mr. Huber said. “We knew that selling, from a behavioral standpoint, would abate at the start of the year, so we took advantage of it and bought the stock, which we thought was cheap.”

Since the start of the year, Herbalife’s stock price has gained 131%.

“Behavioral analysis is pretty prevalent with us,” he said. “The most common use of it is through reversion to the mean, and it’s pretty powerful, but it’s hard for most people because human brains tend to think linearly.”

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