Quick Take:Richard Eisinger of Mosaic Equity Trust Mid-Cap Fund (GTSGX) runs a slim portfolio of roughly 30 stocks. That makes him much more of a stock picker these days, which is significant when you consider that the fund has outperformed its peers — generally stuffed with more holdings — while exhibiting less risk.
For the three years ended in June, the Mosaic Mid-Cap Fund returned 12% annualized, versus 6.3% for the average mid-cap value fund; standard deviation is 15.4, vs. 17.1 for the style. Although Standard and Poor’s classifies the portfolio as a mid-cap value fund, Eisinger pegs it as a mid-cap blend offering, with perhaps a slight leaning to the value side. While returns based style analysis supports a value style, an analysis of recent portfolio data indicates that the fund may have begun to take on blend characteristics. Either way, the portfolio compares favorably.
Eisinger, who has co-managed the fund with Jay Sekelsky since June 1998, pays careful attention to stock valuations in order to avoid downside risk. The firm’s growth-at-a-reasonable price philosophy is applied to companies with sustainable competitive advantages, consistent earnings, and top-quality management.
The Full Interview:
S&P: How would you define your investment approach?
EISINGER: There are three `pillars’ to what I call our philosophy on the mid-cap fund.
We look for companies that have sustainable competitive advantages. That is a term that is often used, but usually the company is a market leader and is in a business with high barriers to entry. Warren Buffett calls it `wide moats’ around the business.
Then we want predictability and sustainability of earnings and/or cash flow. There are certain businesses, such as some technology companies, for example, that run a high risk of becoming obsolete. These are businesses where it is very difficult to predict the cash flow several years out.
The third pillar is the management team. We want a high quality management team with a high level of integrity. I imagine that there are a lot more portfolio managers saying that now, but we have always looked for quality management that can allocate capital wisely.
S&P: These are the elements that make a ‘good’ company?
EISINGER: Yes. They provide the basis for a good company. The idea is that you have these predictable free cash flow streams. You need a management team that knows how to allocate capital wisely, whether it is buying back shares, reinvesting in the business, paying down debt, or simply paying a dividend back to investors. You also want a company with a strong balance sheet.
S&P: Once you have identified these companies does that necessarily mean it is time to buy?
EISINGER: No. We are a growth-at-a-reasonable-price investment management shop. Valuation is part of our process. When we are buying a stock we always ask ourselves what is the worst case scenario? If that occurs, we want to determine what the down side in the stock is going to be. Valuation is a big part of that. It helps us limit risk.
S&P: Roughly how many positions are in the fund’s portfolio?
EISINGER: Roughly 30. We say we will own anywhere from 20 to 35. I definitely like being a more concentrated manager. I really like knowing the company. I just don’t think there are enough great opportunities out there to own 150 companies. I like to be more of a stock picker.
S&P: What are your top holdings and how do your sector weights break down?
EISINGER: As of June 30 the top holdings are Markel Corp. (MKL), White Mountain Insurance (WTM), Odyssey Reinsurance (ORH), Expeditors Intl. (EXPD), Charter One Financial (CF), Toys R Us (TOY), Mercury General (MCY), Office Depot (ODP), Ethan Allen Interiors (ETH) and Edwards Lifesciences (EW). The top 10 make up about 35% of the portfolio.
As of the end of June the largest industries are financials at 32.9%, consumer discretionary at 22.3%, industrials at 8.8%, health care at 7.2%, and technology at 6.9%. We are currently at about 12% in cash. Over the last year cash has averaged 9 or 10%.
S&P: How does your top holding illustrate the investment philosophy?
EISINGER: Markel is a specialty property and casualty insurance company that focuses on segments of the market where there is not much competition and where there is less pricing pressure. For example, they insure taverns and bars, equine related risks, day care centers, and summer camps.
They are a niche player, so that gives them an advantage in pricing. You could say that there is sustainable competitive advantage, given the fact they are the market leader. It is going to be difficult to knock them from their perch. They have grown book value at about 20% for the last 10 years, which is an amazing feat. I think that is higher than anyone in the insurance industry, including Berkshire Hathaway.
Markel is a little bit like a miniature Berkshire Hathaway, since the beauty of the business is that if you give them $1,000 to insure you, they don’t have to pay the claim out for usually two or three years. They have what they call a premium float, which they can invest in the meantime. It is really interest free money to invest. That has been the beauty of Warren Buffett’s company for years and years. He can invest money that he is really getting interest free. Markel has a very capable equity investing management team too, which makes them different than a lot of insurance companies.
S&P: Would your holding in Ethan Allen Interiors benefit from home sales and the strong real estate market, or be affected by a slowdown there?
EISINGER: I am glad you asked since that is one of my favorite stocks. We also have an indirect exposure to Mohwak Industries (MHK), which makes carpeting and flooring.
I am really impressed with Ethan Allen. People are concerned that the consumer is going to slow down his spending and that the housing boom is eventually going to end. As a result, the stock is pretty cheap at 12 times next year’s earnings.
But Ethan Allen is unique since they have 17 of their own manufacturing facilities. They do everything. They manufacture and distribute their products. The have retail stores as well.
They have the best margins in the industry by far. They are also broadening their appeal. Traditionally, they have been kind of a colonial, traditional furniture seller, but they have fostered more contemporary lines of furniture to appeal to younger people and those with different tastes. I am very impressed with their chief executive officer too.
When the economy recovers we expect Ethan Allen to grow earnings in the mid teens and take more market share. It is a very fragmented industry, so there are no dominant players.
S&P: What kinds of technology companies will you own?
EISINGER: Two that we own, by way of example, are Kemet (KEM) and American Power Conversion (APCC). They are very low on the technology totem pole, so to speak. They make the ‘nuts and bolts’ for the industry.
American Power Conversion (APCC) makes the electrical surge protectors used in computers as well as in networks. There is not much risk of the technology becoming obsolete. The same is true of Kemet, which makes capacitors, electronic components used in just about everything from communications systems to personal computers.
S&P: Do you have an outlook for the market?
EISINGER: To be honest, I try to focus on companies. I don’t try to join the chorus on CNBC trying to pick the bottom, something we have seen for the last two years. However, I will say that we see some stocks that are very appealing and that can be bought for the long term. They are quality companies with reasonable valuations.