Quick Take: Barry James considers a variety of factors — economic, monetary, and technical — when picking stocks and bonds for James Advantage Golden Rainbow Fund (GLRBX). The balanced fund manager’s key concern is preservation of capital. With stocks, James’ conservatism leads to high-quality value holdings; with bonds, it leads to more high-quality with intermediate-term durations, typically of five years.

Right now, James is cautiously optimistic since he believes presidential election years tend to help investments. As a result, he has boosted the fund’s equity weighting to about 53%, up from its usual 50%. James isn’t getting too aggressive, however, because he believes post-election years tend not to be good for the market.

James’ conservative approach has helped the fund, especially in value markets. For the five-year period through last month, the portfolio rose 6.1%, on average, versus a 2.1% for balanced funds. For the one-year period through last month, it was up 13.8%, versus a 10% gain for its peers.

The Full Interview:

S&P: What are the fund’s investment goals?

JAMES: Preservation of capital is a key objective. The fund is a conservative balanced offering. The equity holdings are among all market capitalizations, so we have large-, mid-, and small-cap stocks. We generally adjust equities in terms of market cap, sectors, or individual stocks. We consider durations and sectors for the fixed-income portion, which is high quality.

S&P: How do you determine the fund’s asset allocation?

JAMES: Each week, we analyze long-, intermediate-, and short-term indicators, such as economic trends, monetary trends, technical trends, and sentiment trends. We do all our own research, and revalidate the indicators every two years.

S&P: What is the current asset allocation?

JAMES: Now, the fund is about 53% to 54% equities, about 46% fixed income, and about 1% cash. Our intermediate-term picture is positive. The fund’s norm is about a 50% weighting in equities. We thought the market would pull back in the second quarter, which it did, and then our indicators improved, so we saw a buying opportunity.

S&P: Why have you become more optimistic?

JAMES: Typically, June, July, and August tend to be good, and election years also tend to be good. The year after elections is a different story, but now we see a rally lasting until the end of the elections. Generally, interest rate hikes aren’t good for stocks, but that makes virtually no difference in election years, according to our research.

S&P: Which areas in equities have you gone into recently?

JAMES: We have been buying more large-cap stocks because small-caps have had a nice run-up in the last few years.

S&P: What are your largest equity sectors?

JAMES: If a sector is underfollowed, we love it. We have liked and continue to like the energy and the utility sectors, because they have the most bargains. As valuations have recently come down, we’ve been buying some technology names.

S&P: What are the fund’s largest stock holdings?

JAMES: They include Coventry Health Care (CVH), Apache Corp. (APA), Edison International (EIX), Devon Energy (DVN), and Newmont Mining (NEM). Coventry Health Care continues to meet our criteria, though its price has gone up a lot. The company’s earnings have been strong, and it has been outperforming the market.

S&P: How do you approach the fixed-income portion of the fund?

JAMES: Our bond indicators had been negative for awhile, but they have turned positive, so we’ve been a bit more aggressive. The year after a presidential election tends to be pretty good for bonds.

S&P: What is the fund’s duration?

JAMES: Typically, we have about a five-year duration. We may take some risk with duration, sometimes going up to a six or six-and-a-half year duration.

S&P: What is the fund’s credit quality?

JAMES: It is A or better, which is typical. We won’t buy lower quality bonds. We have corporate bonds, agencies, and treasuries, but no high-yield bonds.

S&P: Why have the fund’s long-term returns been competitive?

JAMES: Being an all-cap manager and having small caps has helped, as has our valuation orientation. Our value focus didn’t help last year, which was a growth year, but it’s helped this year.

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.