From the April 2007 issue of Wealth Manager Web • Subscribe!

Farming for Profits

Detached from the hustle and noise of the markets, Jeff Auxier runs $500 million in assets from the suburbs of Portland, Ore. And that's how he likes it. "Investing requires that you be a loner," he says. "You've got to be somewhat against the grain."

Auxier lives on a farm where he raises hazelnuts, timber, cows, goats--and his four children. And he applies the same hard work and discipline of his lifestyle to investing. "If you can make it in farming over the cycles, you're a really great manager because it's a tough business," he says. Farm life, Auxier adds, has shown him just how hard it is to make money with undifferentiated commodities as well as the potential devastation of borrowed money.

"What we try to do is find industries where we think we can get an edge, then focus on high-return businesses in them, and watch when they get it," Auxier says. It requires patience, but it has paid off. The Auxier Focus Fund was up 72.26 percent between Dec. 31, 2000 and Dec. 31, 2006 compared to 18.98 percent for the S&P 500 over the same period.

From Retail Broker to Institutional Manager

"I've had a passion for doing this since I was a teenager," Auxier says. "To me, it's the passion to research. I love reading. I love research." After graduating from the University of Oregon in 1981, Auxier collected career advice from successful investors. He had an influential conversation with Warren Buffett--before Buffett became a media star. Buffett told Auxier not to go to New York--where business pressures would stop him from doing careful research--to be an analyst. So Auxier decided to start out as Buffett had, as a retail broker, joining Foster Marshall-American Express (now part of Citigroup) in 1982.

Auxier used Buffett's approach with his clients, picking stocks using basic fundamentals. "Everything we've tried to do is along the lines of those proven, long-term, enduring principles," he says. Auxier found, however, that retail brokerage wasn't the perfect base for this way of doing business. It was hard to motivate people to buy things that the market hated. "You should be more of a librarian than a salesman," he says, "but business is driven by sales." Great investors look out for facts, keeping emotions out of their decisions, but great salespeople, he notes, get customers excited to place the order right now.

His solution was a separate account management program. Smith Barney set up its Portfolio Management Advisory Board in the late 1980s, and Auxier joined Jamie Dimon--now CEO of JP Morgan Chase--and other brokers and executives to create policies that would make discretionary accounts serve client interests. The business model included high levels of disclosure, reasonable fees for asset management, and no broker compensation for trading the portfolios.

Auxier credits this experience with improving his own discipline. "If you are trained in separate account management with a lot of disclosure, where people can see everything, you are a much better manager because you can't hide," he says. There was no room for end-of-quarter window dressing if customers received all trade confirmations, and no way to blame losing ideas on the customer if the broker had discretion. "There's no subsidy for loss, and you are dealing with peoples' life savings," Auxier explains. "That's why I think it gets back to high-grade ethics, research and a focus on fact-finding."

In 1998, Auxier left Smith Barney to start Auxier Asset Management, combining his love of fundamental research with the stewardship principles he developed in his years of separate-account management. The firm runs the Auxier Focus Fund with similar principles. About 75 percent of Auxier Asset Management's $500 million assets are in individual accounts; the other 25 percent is in the Auxier Focus Fund, the mutual fund he launched in 1999.

Focus on Research

Auxier and his small staff use aggressive fundamental research to determine the health of a company's business. "The business is going to create the returns, so you want to be a business analyst. If you are right on the business and the management, then the returns will follow," he says. "We want to compound money consistently, so that requires a business with some predictability." A key concern for Auxier is how easy would it be to wipe out a business entirely. Would it take price pressure from competitors? A new technology? A change in fashion trends? He also compares a company's balance sheet to the capital allocation of the industry, because, he explains, that provides clues to the company's financial management skills and the leeway it has during a rough stretch.

Using the results of this research, Auxier draws up a watchlist of stocks that meet the firm's investment criteria in every respect but price. At times, the list has had 400 names. "Sometimes it will take a couple of years," Auxier says. "You're doing the homework every day. You've identified who you really like and what you want to own; then you wait. There are opportunities for long-term investors because they are dealing in arenas that are short-term." Market volatility resulting from investors whose investment style or performance pressure leads them to trade frequently or sell stocks quickly on bad news is good for Auxier because it creates price breaks that let his firm acquire positions on the cheap. "The pricing will lead to the performance," he says.

"We like inspired management in uninspired industries," says Auxier, but he only meets with a company's executive team after he's crunched the numbers. "There are a lot of good salespeople out there," he points out. They get into the corner office by telling great stories, often about themselves, to the company's board of directors, and they continue to sell themselves to investors. Auxier would rather develop convictions through his research. "If you don't go through that day-to-day, grind-it-out fundamental research, you are going to get clipped."

The Importance of Ownership

Although Auxier meets with management late in the research process, he sets store by good managers with big stakes in their companies. Ownership shows commitment, he believes, and the internal stability that keeps a management team from panicking when business is tough. "If you could get a good business and get a big block, you can insure high compounded returns for a long time," Auxier says. "If you don't have big inside ownership, then the firm can't endure during the down cycles," especially with so much current interest in private equity.

He applies the same philosophy to his own company. "We wanted more of the principal mentality than the agent mentality. I have a huge amount of my own money in this thing," he says. Not only are his family assets included in the money management portion of the business, but he also holds 2 percent of the Auxier Focus Fund's assets. That gives him a perspective on what his customers are going through and makes it easier for him to remain committed to his strategy.

Such commitment is tough for money managers who want to follow long-term strategies, but are priced daily and evaluated quarterly. It's not unusual for some to stray in order to achieve a performance number--harming investor returns in the long run. "If managers have a huge amount of money on the line, that's going to help," Auxier says. "They're going to protect principal instead of following a bubble to try to beat an index."

Because his strategy involves buying company shares when they are out of favor, Auxier wants his clients to know that he's in there with them, committed to the payoff of long-term capital appreciation. "Sharing on the downside is a big thing, and I try to be a major investor on all the things that we do. It's important as a steward of people's money."

Wealth Management as Stewardship

"Beating an index is important," he adds. "But what's more important is that someone worked hard and earned this money, and we're going to protect that as a steward first. Then we're going to get a return." That approach requires client education now, just as it did when he first got into the business. "What we try to do is constantly educate the clients, so that they understand the philosophy," he says. "When you're dealing with people's life savings, you'd better be pretty tenacious when it comes to finding the facts."

Auxier loves the research that enables him to make money for his clients, and he thinks that being out on his farm--away from the crowd--makes him better at it. After all, "You need someone who's a curmudgeon, a steward, and a watchdog managing your money," he says.

Ann C. Logue, CFA, has worked as an analyst and is the author of Hedge Funds for Dummies.

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