Quick Take: While many money managers try to forecast what they can gain from an investment, J. Jeffrey Auxier, who runs the Auxier Focus Fund (AUXFX), first tries to determine what he might lose.

In picking stocks and bonds for the fund, which currently has a quarter of its assets in fixed-income investments, Auxier focuses on companies he deems essentially sound, but whose securities are temporarily undervalued because of a short-term problem.

Given his approach to investing, Auxier says he expects the four-year-old fund to perform better in a market that’s falling than one that’s rising. The Auxier Focus Fund’s returns don’t contradict him.

The Auxier Focus fund gained 1.9% for the three years ended in January, compared with losses of 13.8% for the S&P 500 and 6% for the average large-cap value. The fund was down 10.4% for the one-year period through February, while the index was off 22.7%.

The Full Interview:

With the market in the throes of a three-year downturn, you might think it’s not much fun picking stocks these days. Not so, says J. Jeffrey Auxier.

“That’s when you get the bargains,” says Auxier, who oversees the Auxier Focus fund. “We’re trying to buy great companies cheap, and to do that you’ve got to have bad news.”

As long as the story depressing a stock doesn’t linger, Auxier is willing to bet on a company others are avoiding. He looks for businesses he considers fundamentally sound which are facing a short-term problem that has caused investors to temporarily shun them.

In selecting the fund’s stocks, Auxier scans for companies that consistently grow profits by about 9%-12% and whose stocks are priced low compared to their earnings, sales and cash flow. He prizes those with strong industry positions or a competitive edge, like the ability to raise prices or to produce goods cheaper than competitors.

Auxier doesn’t limit the portfolio to stocks, however. “The fund is set up so it’s pretty flexible,” he says. “We let value determine the capital allocation.”

Lately, Auxier says, he has been having difficulty finding enough attractive stocks, so the $19.4 million fund has about 25% of its assets in U.S. and foreign corporate and government bonds. Another 14% is in cash, which can serve as a cushion when stocks fall.

Various debt securities of Waste Management (WMI) constitute the top holding in the fund. Auxier says he likes Waste Management’s steady revenue production and cash flow. The fund’s major debt holdings also include 8.25% bonds of finance company GATX Corp (GMT) that mature in September 2003.

Although classified as a large-cap fund, Auxier Focus owns companies as small as City Bank (CTBK), a Lynnwood, Wash.-based commercial bank with a market cap of $230 million. The size of a company is not his “primary focus,” but larger ones tend to have the dominant industry positions he prefers, Auxier says.

At the other end of the spectrum, the fund’s major stock holdings include Altria Group (MO), the giant manufacturer of cigarettes and food products formerly called Philip Morris Cos. Auxier says he was drawn to the company because of its 9% earnings growth rate and its stock’s high dividend yield.

“It’s one of those companies that everyone loves to hate,” Auxier says. “But when it comes down to the bottom line, they’ve got tremendous free cash flow.” In addition, Altria is benefitting from the weak U.S. dollar, which makes its products cheaper abroad, he notes.

Auxier said Travelers Prop & Casualty`A` (TAP.A) is one of his favorites because like other property casualty insurers it is enjoying pricing power, but unlike many rivals it has adequate reserves for losses.

The No. 1 stock in the fund is Guidant Corp (GDT), which makes devices to treat heart diseases and disorders. Auxier cites as the company’s primary attribute its leading position in the manufacture of pacemakers, defibrillator systems, and other products for controlling heart rhythm. Guidant also sports very high returns on invested capital, he says.

In a related area, Auxier says he has been attracted to drug stocks lately because they appear reasonably priced. His investments include Bristol-Myers Squibb (BMY), Pfizer, Inc (PFE), and Schering-Plough (SGP).

“Some of these are not great fundamental stories,” Auxier says. “But the prices are so cheap that with their balance sheets I think they’re attractive long-term holdings.”