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Ten good reasons to buy the Appleseed Fund

moneylogo_optBY WARREN BOROSON

Here are 10 reasons why I’m buying shares of the Appleseed Fund (in Chicago):

  1. It's not tightly correlated with most existing portfolios. Its R-squared is only 83 -- meaning that only 83 percent of the time does it follow the Standard & Poor's 500 Stock Index.
  2. It has a huge exposure to gold. (My own portfolio doesn't.)
  3. It's run by a team. Five people, including a father and his two sons. And four out of five must agree before a stock is purchased.
  4. It has a healthy exposure to health care -- including Pfizer. (I’m optimistic about health care.)
  5. It's small, with only $190 million in assets.
  6. Its alpha is 12.1. Alpha measures how well a fund did, given its volatility. Any alpha above zero is considered good.
  7. It’s no-load. (But there’s a 2 percent early-redemption fee.)
  8. The minimum first investment is only $2,500. 800-470-1029.
  9. It’s a “go anywhere” fund, but classified by Morningstar as mid-cap value. (It actually buys large, mid-sized, and small stocks.)
  10. It’s a socially conscious fund.

Oh, I almost forgot reason No. 11. Over the past three years, the fund is up 13.3 percent a year. The S&P 500 is up a mere 0.91 percent over three years. The average mid-cap value fund is up only 3.7 percent.

Oh, and Morningstar rates Appleseed low for risk and high for return. And M* writes that the fund “a standout.” (Okay, that’s more than 10 reasons. So sue me.)

What else is there to like about the fund? One of the managers, Josh Strauss, answers questions intelligently and frankly. (He’s one of the brothers.)

NJNR: Some of the five partners are Chartered Financial Analysts?

JS: All five of us are. And two of our three analysts are, and the third analyst is on his way.

NJNR: Impressive. I was surprised to read that yours is a socially responsible fund.

JS: Yes, we exclude the sin stocks – alcohol, tobacco, gambling, and porn. We also exclude the too-big-to-fail banks. In general, we prefer to invest in companies that have a positive effect on the world’s environment. But if a company’s price doesn’t have a favorable valuation, we’re not going to buy it.

NJNR: You’re value investors, looking for good, cheap stocks?

JS: Yes, we buy straw hats in February and sell them in May.

NJNR: I think that Bernard Baruch first said that. A witty man. He also said that the only people who buy at the lows and sell at the highs are … liars.

JS: (Laughs) Only two times in my career have I bought at the lows. But I didn’t sell at the highs.

NJNR: I see that you recently had a solid exposure to health care.

JS: We do like health care; we like pharmaceuticals. They’re very inexpensive stocks; it’s a very inexpensive category. They’re totally unloved and have been so for many years. The knocks on them are, 1: you’ve got health-care reform, putting pressure on top-line margins, and that’s very real, although in my opinion a lot of that is really in the past, and 2: their pipelines.

An example is Pfizer. We own Pfizer, and it has the biggest drug in history expiring at the end of this year.

NJNR: Lipitor.

JS: Lipitor represents a huge amount of cash flow for Pfizer, and you’ll see the effect on the top line. Their top line is going to fall roughly 5½ percent from 2011 to 2012.

But, at the same time, because they’ve got new drugs coming on line, you’re actually going to see eps growth for 2011 and 2012. That’s why they bought Wyeth. They wanted to replenish their pipeline. And at the same time, this is a stock that trades at 8.8 times earnings, six times ebita, and has a 4 percent yield. We don’t see much downside, and we think there’s considerable upside.

NJNR: Where else besides health are you over-weight?

JS: We have a big gold position. 17 percent in gold. Physical. We’ve had gold since ’06.

NJNR: Why do you own gold?

JS: There are so many reasons to love gold.

We look at it as a portfolio hedge. Gold will protect us from inflation, will protect us from politicians destroying the value of our dollar, and provide a good counterbalance for the rest of the portfolio. But we don’t like gold miners. At all. Gold miners have amplified returns on gold in good markets and, in bad markets like 2008, they act just as like hybrid stocks – which is what they are. You’ve got big operational risks, financial leverage, and you also have political and exploration risk. And they’re pretty sketchy companies.

NJNR: How do you buy the physical?

JS: We own two closed-end funds that only own the metal. And a couple of ETFs.

NJNR: Where else are you over-weight?

JS: Since the earthquake, we’ve taken a 14 percent position in Japanese equities.

NJNR: You think their economy is going to rebound?

JS: You don’t need much of a rebound for these stocks to work. You need to separate out the high-quality global companies that dominate the economy. For example, we own Mabuchi Motor Co., which makes small DC motors. Motors used to make little things, like the inside of an electric toothbrush. Or the lens in your digital camera. Average selling price for these motors is about 50 cents. Mobuchi has a 50 percent global market share, they produce only in China and Vietnam, 13 percent of sales are in Japan. It’s not a growth company, but free cash flow has been positive every one of the last ten years. The stock trades below book value, and 95 percent of market cap is cash. Supercheap.

NJN: When do you sell? Do you need a four-fifths vote to sell?

JS: When a stock hits our estimates for its value according to our analysts and portfolio managers. We don’t try to hold on.

NJNR: How would you summarize your general investment strategy?

JS: We’re looking to buy undervalued securities for 50 cents on the dollar, on the one hand, and a portfolio that will outperform the S&P 500 over the long term, and still allow investors to sleep better at night – knowing, for example, that we aren’t invested in the tobacco industry.

NJNR: If you were addressing an audience of high school students, what investment advice would you give them?

JS: Avoid the crowd.

Stick with your convictions.

And do your homework.

To receive Warren Boroson’s column regularly, drop him a note at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Comments (1)
1 Saturday, 17 September 2011 12:32
Yah know! It would be nice if to show the Symbol and the M* link to the Fund?

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