Lanny Thorndike and Kevin Callahan of Century Shares Trust

Quick Take: One of the nation’s oldest mutual funds, the Century Shares Trust (CENSX) was established in 1928 to invest exclusively in insurance and banking. This mandate was relaxed in 2001, permitting holdings in all sectors, although at least 25% of the fund’s assets must be in financial and business-related service companies. In 2004, the fund added Microsoft Corp. (MSFT), United Technologies (UTX), and Johnson & Johnson (JNJ).

With $362.4 million in assets at the end of November, Century Shares Trust has been managed by Lanny Thorndike since 1999; Kevin Callahan joined as co-manager in 2001. The conservative, large-cap value fund emphasizes fundamental, in-house research, and its holdings range from 40 to 55 mid- to large-cap stocks.

The fund has low volatility with a standard deviation of 11.8, compared with its peers’ average of 15.4. The portfolio outperformed its peers over the three- and five-year periods through November, ringing up annualized returns of 5.9% and 9.8%, respectively, versus its peers’ 4.9% and 3.4% gains.However, the fund underperformed for the year-to-date (8.3% versus peers’ 9.1%) and one-year (11.4% versus 15.4%) periods through November.

The Full Interview:

S&P: How would you describe your investment philosophy?

CALLAHAN: We view our fund as a core holding combining core and growth approaches. We like mid- to large-cap companies that grow faster than average and generate consistent results. Our universe is about 1200 to 1300 companies whose market cap is $2 billion and above.

We like to buy stocks when they’re attractively valued and then own them for two to five years. If we know a company well and its stock collapses because of a short-term issue, we’re willing to buy and wait two years or longer.

We focus on service-based companies, which tend to be less capital intensive and able to generate higher returns on equity. They also tend to be consistent, stable, and less cyclical.

S&P: What is your investment strategy?

CALLAHAN: We are bottom-up stock pickers. Our five analysts — Lanny and myself, plus three other analysts and a trader, all exclusive to our two funds — follow 40 to 100 names each. Each analyst makes about 80 site visits per year.

S&P: How are the fund’s assets typically allocated?

THORNDIKE: Financials are generally about a 45% weighting, but our current position is probably less than that. Consumer discretionary is about 12%, consumer staples about 1%, health care about 23%, producer durables about 3% to 4%, and technology about 8%. About 4% is cash.

We think our sector approach — which focuses on health-care, consumer, financial, and technology stocks — gives the portfolio a lower risk profile than a lot of our competition. We look to beat our benchmark, the S&P 500, but with lower-than-average risk.

S&P: Does a large weighting in financial services increase your risk?

CALLAHAN: We’re overweight in financials because we emphasize earnings. Although the sector represents only about 20% of the S&P 500′s total market cap, it generates approximately 35% of the index’s earnings.

The top five financial names include Berkshire Hathaway (BRK), AFLAC Inc. (AFL), and Amer Intl Group (AIG). AIG generates ROE and earnings growth of approximately 15%. Despite regulatory issues, it has a strong international franchise and is well positioned for the long term.