newjerseynewsroom.com

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

When might you invest in a new mutual fund – one with little or no record?

Answer: When the manager or managers helped put together a fine record elsewhere. And when the new fund seems to have a real edge – reasons why it might succeed.

That seems to be the case with the new GoodHaven Fund, which has one office in New Jersey. Its managers – Larry Pitkowsky (on the left) and Keith Trauner – spent years as portfolio managers and analysts with the high-flying Fairholme Fund, run by Bruce Berkowitz. They left Fairholme by mutual decision, the two gentlemen tell me, and Berkowitz has wished them luck with GoodHaven.

GoodHaven, thank the lord, is a no-load fund with low total expenses. The expense ratio is fixed at 1.1 percent. There’s a 2 percent redemption fee only if investors sell within 60 days of purchase, and the minimum first investment is a high $10,000 – but that helps keep expenses down. (It’s only $2,500 for retirement accounts.)

So, what are the fund’s edges?

Flexibility. It’s a go-anywhere fund. Inside the U.S., outside the U.S. Big-company stocks, small-company stocks, and in between. Stocks, bonds, liquidations, mergers, and so forth.

“We’ll go where the value is,” says Pitkowsky. “We’re as flexible as you can be.” As far as which area might do best, “We’re agnostic,” says Trauner, “but we will avoid areas where we can’t add value.”

Another edge they have: They eat their own cooking. Both have their own money in the fund. Their slogan: “Our money with yours.”

Also, they are true value players. They want good stocks that come cheap. Says Trauner, “A lot of ‘value’ managers pay lip service to the investing philosophy of Graham and Buffett. But there aren’t many who actually follow their ideas in a highly disciplined way.”

After all, it’s easier – psychologically – to buy recent winners (the growth strategy) rather than buy recent losers (value). And growth stocks, if they pay off, typically pay off sooner than value stocks, which often require the patience of Job. And value investors have to deal with the patience of skittish shareholders.

The two gentlemen also bring plenty of experience to the table. Trauner has 30 years, Pitkowsky 20. “There aren’t many advantages to being older than 25,” says Trauner, “but lots of experience and knowledge is one of them.”

So, are there slim pickings now – or a lot of low-hanging fruit? (I’m a genius when it comes to clichés.)

“There’s plenty for us to look at,” says Trauner. “But money is not burning a hole in our pockets. We have plenty of cash and are prepared to invest quickly given the right ideas, but we’re disciplined. We always want to have some cash so that, even under stress, we’ll have money to buy without worrying about what to sell.?

There are two approaches to investing, says Pitkowsky. 1. You try to predict the future. An approach that few people seem to be good at. Or 2. you buy good but cheap stocks – positioning yourself for whatever comes.

What numbers do they concentrate on when seeking value? Free cash flow comes first, says Trauner. How much is left over after spending money to keep the business open. How much you have in your pocket at the end of the day. “It’s an important number.”

What else? A corporation’s ability to raise prices is important, as is some kind of sustainable advantage over the competition.

A complicated situation is sometimes desirable, too – that scares investors away and keeps the price low. Also desirable: an investment that’s not correlated with the stock market, that may go north when the market goes south.

In short, says Trauner, “In a perfect world we would buy a great business run by great people with significant cash flow at a price offering us a high return.”

Why an office in New Jersey, in Milburn, besides one in Florida? Says Pitkowsky, “I grew up here, and I have friends and family here  You can have access to a lot of businesses here.”

Besides which, spending some time outside of the metro New York area may help to assure that your views are not contaminated by the general consensus. “We can listen to our own voices,” says Trauner. “Twenty or 30 years ago, it was difficult to get information. Today, it’s easy to get information, but difficult to filter out what’s not important.”