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.