Cabot Top Ten Report, Top Money Manager Share Strategy

Reprinted from The Baton Rouge, LA Advocate:

Anderson outpaces markets while minimizing risk

By Gary Perilloux, Advocate business writer

Published: April 21, 2008

Why spin your wheels when you can do the locomotion?

That outlook carried Frank Anderson through life as a payroll master for a forerunner of the Burlington Northern Santa Fe Railway, where Anderson rode his stock portfolio on the twin sturdy rails of his employer and never once hopped off to buy shares of another company, let alone purchase an automobile.

When he died, Anderson’s safety-deposit box revealed a stack of railroad stock certificates he’d held for eons.

The investment strategy repeated itself when, in 1990, Anderson’s son Budd died. Budd Anderson’s safety-deposit box yielded shares of Standard Oil from his 42-year career with the company that evolved into Exxon Mobil. The proceeds gave a grubstake for a third-generation Anderson to put up a shingle as an investment adviser.

B.F. “Andy” Anderson, 53, wouldn’t be in that business today if his investments were as conservative as his forefathers, but their lesson of endurance investing isn’t lost on him.

Rather than pursue lockstep fidelity to the railroad company or a mega-oil corporation, Andy Anderson places his trust in a broader, calculated measure of the equity markets at Baton Rouge-based B.F. Anderson & Co., which manages $50 million for about 150 clients.

Reasonably priced emerging growth stocks—green bananas, as Anderson calls them—are at the core of his investing philosophy. He’s not, however, wedded to a single one of the 20 stocks that move in and out of his multi-cap equity growth fund.

At the end of 2007, Anderson’s fund had scored a 16.89 percent annual rate of return for the past decade—highest among more than 800 money managers tracked by San Francisco-based Money Manager Review.

The review doesn’t track mutual or hedge funds, but private money managers like Anderson aim for high net-worth individuals who don’t want to pool all their assets in a huge fund, said Peter Walker, founder of the 20-year-old Money Manager Review.

“You want to find a manager that has above-average return and below-average risk,” Walker said. “(B.F. Anderson’s) return is very high. But their risk is actually higher than average for that style group — essentially you’re getting more bang for the buck, but you’re taking more risk to get that bang.”

On that point, Anderson differs with Walker.

Risk, measured by Walker’s online publishing business, takes the standard deviation of a money manager’s individual performance each quarter and compares it with the average of all managers in an investment category. A greater deviation generally indicates greater price volatility and greater risk.

Anderson, though, wields an emergency railroad brake that shuts down a runaway stock from crashing his portfolio on the downside.

He screens his stocks daily for up to 10 measures — prizing such things as simultaneous growth in sales and operating margins without an accompanying cost-cutting strategy by the company in question.

 Cash flow is king, but consistently performing in the Top 20 percent for all 10 fundamentals is Anderson’s Holy Grail.

On a recent day, the universe of such stocks screened by his software stood at 50 out of about 7,300 candidates.

Should one of his stocks lose 20 percent in value (sometimes less), Anderson jettisons it. But with the risk spread over 20 stocks, none of the stocks typically represents more than 5 percent of the total assets, and a 20 percent drop in one of them accounts for no more than a 1 percent decline in the total portfolio.

Anderson’s stop-loss system—patterned on concepts by Depression-era investment guru Gerald Loeb and honed with a mentor, New Orleans portfolio manager Gene Newton—sets a 1 percent floor for portfolio losses.

Hence, the 1 percent solution for risk.

Still, there are right reasons for breaking a rule, Anderson said, and he’ll invite more risk if the rewards merit it.

In 2007, Anderson’s multi-cap equity growth fund produced a whopping 66 percent return. His gonstermacher was a bright little stock out of Phoenix, First Solar Inc., that in one year went from trading at $50 after a late 2006 initial public offering to nearly $300 a share today, from $135 million in revenue in 2006 to $504 million a year later, from $4 million in annual earnings to $158 million.

First Solar, Anderson realized by his gut and his research, potentially represented the rare company that changes the world over a generation, the way Wal-Mart revolutionized retail, the way Intel revolutionized computer chip-making.

Its game-changing technology is building solar energy modules with semiconductors derived from cadmium and tellurium — a much less-expensive proposition than employing silicon. Already, the company has hundreds of millions of dollars in European contracts.

“I have to convince you to invest in green bananas,” Anderson said. “If you are only putting your money in ripe bananas (mature companies), there’s no up-side. Johnson & Johnson is a great company, but they make gauze. The Chinese are making gauze, and there’s no profit margin in gauze — but (Johnson & Johnson) has a low standard deviation.”

And that is Anderson’s rejoinder to the analyst who says he carries significant risk. Of course I do, is Anderson’s reply, it’s why my clients make money.

Mutual funds often trim their allocations in individual stocks to keep them from representing more than, say, half of 1 percent, Anderson said.

Recently, about 20 percent of his fund leaned on First Solar, but he has refused to trim the stock, because its fundamentals, its performance and its potential are simply too good, he said.

What Anderson scrupulously avoids are companies in highly competitive markets, such as the large financial companies who fed too hungrily on marginal loans and helped spawn the recent subprime mortgage crisis and resulting credit crunch.

“I find that to be the riskiest thing you can do,” Anderson said of buying companies that operate in highly competitive marketplaces.

Better to buy stocks that carry a competitive, almost monopolistic advantage, he said, like Canadian-based Potash Corp. and Minnesota-based Mosaic, each of which has seen its stock soar in a fertilizer-starved marketplace.

On April 20, 2007, one share of Potash sold for $62. A year later, the stock has more than tripled.

Louis Navellier—whose Reno, Nev., company manages $5 billion in assets, much of it for pension funds—currently has 40 percent of his holdings in commodities: oil, agriculture, steel, gold and other mining interests.

The broad strategy is simple, he said: About 88 percent of the world’s commodities are traded in dollars, and the weak dollar is driving the price of commodities upward.

“I’m very well-positioned unless there’s a sudden shift in the dollar,” said Navellier, whose sole investment in a financial company is MasterCard. “The bottom line is a money manager has to be careful when investing in financials today, so he’s trying to go to things that don’t have subprime exposure.”

Navellier said Anderson’s approach to picking 20 well-positioned stocks works for companies with large market capitalizations—$10 billion or more in shares multiplied by price—but with small cap companies (typically less than $2 billion) he’d feel more comfortable spreading his portfolio over 80 to 90 stocks.

Navellier, who also screens thousands of stocks to find a select few who meet his criteria for growth and performance, claims Wall Street at-large has a disconnect with fundamentals. He obsesses over them.

He directs investors to a free stock grader at his Web site that measures the fundamentals of 5,000 stocks. The main intent, Navellier claims, is not to drive potential customers to a longstanding newsletter that bears his name or to his custom funds, but to help people get better at investing—something the 50-year-old claims is increasingly important to him as he gets older.

“It’s basically we’re very proud of what we’re doing and we’re very systematic and clinical, and as I get older I’m starting to share my research with more people,” Navellier said. “I’m at an age where I just want to help people: I’m not a pig.”

While encouraging investor education, Anderson cautions that most money managers need 10 years under their belt to understand the nuances of financial markets, and he’s grasped a command of the complexities over 30 years.

That’s something Baton Rouge attorney Steve Covert said he doesn’t have the time or discipline to do, though he enjoys mapping out investment strategies with Anderson. Covert has more than $600,000 invested with B.F. Anderson.

“The lay person—they’re going to get distracted,” Covert said. “Andy does this all day long. He’s consistently beat the market in the past 10 years.”

Anderson said his approach is predicated on not trying to outthink the market but listening to it. Despite a rash of bad financial news in recent months, he insists it’s not time to leave stocks for more secure but lower-yielding investments.

The 50 companies scoring top performance in all 10 of the fundamentals he tracks represent a growing number, one that’s higher than at any time in the past year, he said.

Navellier, whose home city has 18 months of unsold housing inventory with a median price down 40 percent from its peak in a “brutal” market, nevertheless agrees there won’t be sufficiently bad news to turn a market correction into a bear market.

“I think there’s so much stimulus coming down the pike, I think it’s going to be fine,” he said.

Michael Cintolo, who edits “The Cabot Top Ten Report” newsletter for Cabot Heritage Corp, screens 8,000 stocks in an approach similar to Navellier and Anderson’s, but he’s a bit more bearish on prospects.

“We give you a buy range: We tell you that a stock is strong, and then it’s up to the investor to choose from there,” said Cintolo, who said it’s rare for a stock trading below $15 to make his Top 10 list because those companies tend to perform weakly. “We’ve been telling people to be cautious every week. We’ve not been telling people to buy heading into a bear market. We’ll let them know when the bull market returns.”

What investors shouldn’t obsess about, Anderson said, are the minutiae of miserable news items confined to certain sectors of the financial markets.

“I believe we’ve entered a new bull market (since late 2002) that’s going to last decades,” he said. “People need to quit worrying about the day-to-day — and turn off the damn TV.”

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