Headline risk and market volatility is music to the ears of David Rainey, manager of the $660 million FBR Focus Investor Fund Ticker:(FBRVX).
When you're managing a portfolio of less than two dozen stocks and the average hold period is nearly six years, choppy markets are just short-term buying opportunities, according to Mr. Rainey, who co-manages the fund at FBR Fund Advisors along with Brian Macauley and Ira Rothberg.
“We believe that volatility is the friend of the long-term investor,” Mr. Rainey said. “And we spend our time looking for great businesses that can grow through market downdrafts.”
Examples of that strategy were seen over the past six months when the normally static portfolio took advantage of market volatility to add five new positions and “substantially” increase the weightings in two existing positions.
The fund, which is categorized by Morningstar Inc. as mid-cap growth, has recently added Google Inc. Ticker:(GOOG), World Fuel Services Corp. Ticker:(INT), Roadrunner Transportation Systems Inc. Ticker:(RRTS), Henry Schein Inc. Ticker:(HSIC, and Marlin Business Services Group Ticker:(MRLN).
The portfolio currently has a 25% allocation to small-cap stocks, 25% to large-caps, and 50% to mid-caps.
“That [mid-cap weighting] is not our bet, it's simply where we are seeing value right now,” Mr. Rainey said.
The strategy is purely bottom-up fundamental, but there are some areas that the portfolio is likely to avoid, including airlines, mining, medical device, biotechnology, and “black box financial strategies,” he said.
“We like companies with lots of revenue visibility and low-maintenance [capital expenditure] needs,” he added.
Of the 21 industry sectors represented in the portfolio, only the financial sector includes more than one stock.
Those two stocks, Diamond Hill Investment Group Inc. Ticker:(DHIL) and T. Rowe Price Group Inc. Ticker:(TROW), combine for a 3% weighting in financial stocks.
Then there are the heavyweights represented by O'Reilly Automotive Inc. Ticker:(ORLY) and American Tower Corp. Ticker:(AMT).
Retail and wholesale aftermarket automotive parts supplier O'Reilly is the largest weighting in the fund at 11.5%. The stock is trading at nearly $78 per share and is up more than 28% from the start of the year.
American Tower, an owner and operator of cell towers around the world, makes up 10% of the portfolio and is trading at nearly $60 a share; up more than 13% from the start of the year.
“Both these companies were able to generate high single-digit growth rates throughout the great recession,” Mr. Rainey said.
The fund's 10 largest holdings make up 70% of the portfolio assets. And Mr. Rainy makes no apologies for heavy concentrations, acknowledging a prospectus that enables sector weights of up to 25%, which would equate to 25% in a single stock for this fund.
“From our perspective, two dozen names is enough to diversify most business-specific risk,” he said.
The fund, which has a four-star rating from Morningstar, has gained less than 1% from the start of the year.
The performance is comparable to that of the S&P 500 Index, but compares more favorably to the Morningstar mid-cap growth category average decline of 2.4% over the same period.
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