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.