Robert Bruce of the Bruce Fund

S&P Rank: 4 StarsJuly 2, 2003Balanced, with a

Quick Take: There may come a time when the Bruce Fund will be completely invested in stocks, but that time is not now, says Robert Bruce, who manages the portfolio with his son, Jeff. The elder Bruce doesn't think the recent stock market rally is for real. As a result, the $175-million fund has only 41% of its assets in common stock. The rest is in U.S. Treasuries, convertible bonds, and preferred stock.

"We have no fixed criteria," Robert Bruce says of his portfolio's breakdown by asset class. "We look at the market and try to figure out where the best opportunities are for capital appreciation." When he does move into common stocks, Robert Bruce looks for shares that have gotten beaten down but that he thinks will rebound nicely. He's also not scared of potentially volatile investments, like biotechnology companies.

This year though the end of June, the fund returned 27.5%, versus 8.9% for the average balanced fund. For the five-year period ended May 30, the portfolio returned an average annualized 11%, versus 1.9% for its balanced fund peers.

The Full Interview:

Robert Bruce lacks faith in stocks, despite their recent surge.

"We do not think this is the start of a new bull market under any circumstances," says Bruce, who manages the mutual fund that carries his name. "We think it's a rally in a bear market."

He sees no industry or sector that would lead an advance on Wall Street. Bruce argues, too, that during its three-year decline, the market never dropped to the point where people threw up their hands and swore off equities. When other investors finally capitulate and back out, Bruce says he may move in.

For the time being, Bruce has allocated only about 41% of his fund to common stocks. In picking these, he looks for issues he thinks have been "vastly oversold," but that he believes have the potential to recover and thrive.

Bruce says he prefers companies with strong cash flow and balance sheets, although he's willing to own those that appear financially weak if he thinks they will eventually turn around. In addition, Bruce is fond of stocks that are not widely followed by the investment community. He notes that these can rise rapidly when mainstream analysts start tracking and recommending them.

Bruce will invest in companies of any size, but his fund is made up mostly of small caps, he says.

Among the fund's stocks, Bruce's No. 1 holding is America Service Group (ASGR), which provides managed health care services and supplies drugs to correctional facilities and military bases in the U.S. These businesses can hold up even in a recession, Bruce says.

The company had encountered difficulties primarily because of five contracts, which will expire by the middle of next year, Bruce says. As those pacts run out, the company's performance should improve, according to the fund manager. He adds that America Service has been generating profits lately.

Bruce began investing in the stock about a year ago, when it was priced at about $6. America Service shares closed at $17.83 today.

Another of the fund's largest stock positions is in Team, Inc (TMI), which repairs leaks in oil and chemical pipelines and makes machines for cutting metal. The Alvin, Texas-based company is very well managed, Bruce says. He's owned Team for 15 years. His shares cost about $2.50 on average. They closed at $8.10 today.

One of Bruce's favorite stocks is Atrix Laboratories (ATRX), which makes drug delivery systems, including those used in treating prostate cancer. Atrix, Bruce says, expects to become profitable in the fourth quarter this year and to break even in 2003. The fund manager says he envisions the company generating "reasonably good" earnings over the next two to three years. Bruce has owned Atrix for about seven years. His shares cost $13 on average. The stock closed at $22.45 today.

Another pharmaceuticals manufacturer Bruce likes is Elan Corp ADS (ELN). American Depositary Receipts in the Irish biotechnology company fell last year on concerns over its complex accounting. Bruce, though, says he was drawn to the company in part because he believes its developmental Antegren drug for multiple sclerosis and Crohn's disease may become a blockbuster. In addition, Bruce is optimistic about the recent appointment of G. Kelley Martin as Elan's president and chief executive. The former Merrill Lynch executive is known as a turnaround artist and "comes with a pretty good pedigree," says Bruce.

His average cost in the ADRs, which he has owned for about a year and a half, is $2. They closed at $5.63 today.

Biotechnology companies also account for the bulk of the fund's investments in convertible bonds, which make up about 28% of his portfolio, Bruce says. He also has stakes in Alexion Pharmaceuticals (ALXN), Cubist Pharmaceuticals (CBST) and CuraGen Corp (CRGN).

A good chunk of his biotech holdings, Bruce says, are in so-called "busted convertibles." These trade so low that they are unlikely to reach the price where they can be converted into common stock. However, they can become valuable if the stock rises.

Investments in these kind of companies can be speculative, Bruce acknowledges, but he thinks the rewards they can offer outweigh their risks. "Not all of them come through," he says. "But they're all looking in interesting areas for drugs that have big potential."

Convertible bonds appeal to Bruce, he says, because they tend to decline less than common stock, and many can provide attractive yields.

An IBasis Inc (IBAS) 5.75% convertible bond that matures in March 2005 is Bruce's top convertible holding. The company, which provides Internet-based communications services, has been growing rapidly and could turn cash flow positive by the middle of next year, he says.

Treasury bonds make up another 21% of the fund. Bruce has a somewhat optimistic outlook for bonds, which he thinks are in the "latter stages" of a bull market. If stocks tumble before the year ends, bonds will get "one last push up," he says.

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