“In 2008 we did better than the S&P by about 8% and were up almost 29% in 2009,” says Bob Millen, Chairman of Jensen Investment Management and Vice president of the Jensen Portfolio.

This large cap growth fund is rated five stars by Morningstar, has a low turnover rate and an expense ratio under one percent according to the fund’s prospectus. Millen argues that like the turtle, the Jensen Portfolio will always trounce the hare when it comes to long term performance. His four man investment team is methodical, currying through countless companies in search of that perfect investment: a value-creating business, with at least ten years of 15% or more return on equity that is shareholder friendly and has a proven management track record in weathering whatever the economy and business cycle can throw at it.

“We are hands-on and management is a critical variable for us. Visiting with management,” he says, “is important; once we have made the investment we periodically return to take the temperature of the company and its management.”

Millen knows better than most how to size up a company and its management, thanks to his background.

“I don’t come from Wall Street, have never been a broker or a sell-side analyst,” he explains,” but I’ve started, ran and sold businesses in my career and when you have that kind of background you approach industry differently. We don’t buy stocks. We try to buy businesses at a discount that generate excess cash flow consistently.”

What, I asked, was the secret to successful long-term investment?

“Patience,” he assured me, “and we find very little of that among the investment community these days. People tend to chase stocks up and down and most often they make the wrong decisions.”

Some of the stocks the fund holds in size are 3m, Microsoft, Johnson and Johnson, Medtronic, Emerson Electrics, Pepsi Cola, Abbot Labs, Omnicom, Cognizant Technologies and Colgate Palmolive.

What is his typical holding period for a stock?

“Around seven years,” he says, “although if we could find a company that meets our standards and doesn’t become overpriced, we would hold it for a lot longer.”

Unfortunately, most investments do become overpriced or, in some cases, the fundamentals deteriorate and the managers are forced to sell it.

Millen contends that they are still finding good companies at reasonable prices despite the markets gains. He believes that 2003 through 2007 was largely a low-quality stock market rally based on excess leverage and cheap credit.

“In 2009 we saw a similar pattern, since the low quality companies went down the most in ’08, they have climbed the most in 2009.”

However, Millen and his team believe we are facing a very slow economic recovery over several years as a result of deleveraging and anemic consumer spending.

“It will look more like a hockey stick then a W or U,” he argues.

The management of the Jensen Portfolio is betting that the high quality, growth companies in its portfolio will do far better in that kind of domestic environment while much of their businesses are exposed to higher growth economies outside of the U.S. That sounds like a reasonable game plan to me.

The fund is rated five stars by Morningstar over 10 and 3 years and last year according to Morningstar, the fund (symbol MACSX) returned an eye-popping 41.44%. All this by investing in bonds, convertible bonds and dividend paying common stocks in places like China, Hong Kong, India, Japan, Singapore, Malaysia, Taiwan, Thailand, South Korea and their newest addition, Vietnam.

“Our beta is lower than our markets and we attract investors with a conservative outlook. The fund is not designed to shoot the lights out or capture all the growth in Asia,” explains Andrew Foster, the fund’s portfolio manager since 2005. Foster also helps manage Matthew’s India Fund, China Fund and Asia Pacific Equity Income Fund.

“It will lag the benchmarks on the way up as well as down but it is designed to temper the declines in Asia.”

That will come in handy in the years to come because although Foster believes the regions growth will far outpace that of the U.S. “these economies will remain volatile and some of these markets on the whole are as volatile as individual stocks in the U.S.”

How volatile? In 2008, for example, while the S& P 500 Index fell 37%, the Asia Pacific Equity Index (ex-Japan) fell 52%, China dropped 51% and India lost 63%. Foster’s Matthews Asian Growth and Income fund, in comparison, declined a mere 32%. Since then all these markets have snapped back smartly and are within arms length of their pre-2008 record highs.

As a result, Foster is fairly cautious.

“China is trading at 17 times current earnings and India trades at 20 times so I would be careful of jumping into these markets right now.”

Yet, over the long term, Foster believes that growth will continue and some of theses countries, like China and India, are just too big and important for investors to ignore.

“We will probably see higher rates and steadier rates of growth out of these markets over the next 3-5 years than in places like the U.S.,” he says, “And Asian companies that you wouldn’t have thought of paying dividends have begun to do so.”

Foster compares the $200 billion in dividends that Asian companies paid to minority shareholders last year versus the $250 billion that S&P 500 paid out.

“Most investors would be surprised at that but even more importantly, the growth rate of dividends in Asia is 18% versus 10% and decreasing for the S&P.”

China, he points out, paid practically no dividends a decade ago but today it accounts for $70 billion of the $200 billion in Asian pay outs, while Japan accounted for $56 billion.

As for investment risk in the region, he points to political instability, trade barriers and the dollar as three areas of concern. It is not China’s government but rather the potential of instability in countries like Pakistan and Thailand which worries him. The threat of protectionism also troubles him in these uncertain economic times, which could hamper trade, the lifeblood of Asian economies. Finally, he sees the end of Asian’s love affair with the dollar.

“The dollar can no longer bear the burden of Asia’s export strategies, so the region is going to have to move toward a different type of independent currency structure but I don’t think they are quite ready for that.”

As always, in the funds we highlight, The Matthews Asian Growth and Income Fund does not charge sales loads or 12b-1 fees and its expense ratio is a reasonable 1.16% according to the fund’s prospectus.

Berkowitz and his staff work hard and they invest right along side their shareholders.

“We eat our own cooking,” Berkowitz said from his offices in Miami, Florida. “I have every bit of my long-term investment money in the fund and I feel it’s important that everyone that works on the fund are shareholders as well.”

That philosophy has proved to be a winning concept. The Fairholme team has generated roughly 13% annualized returns since its inception in December of 1999, according to the Fairholme Capital Management literature, which means it is up 236% compare to a 1.1% loss for the S&P 500 Index during the same time period.

How, I asked, are they different from their competition?

“Our tagline here is to ignore the crowd. We run toward while the crowd is running away from something,” he explained, “and we always keep a lot of cash on hand, about 15% on average.”

That cash (which can be more or less than their long-term average depending on the markets) came in handy last year and allowed Berkowitz to take advantage of what he calls”stresses in the system.”
“It’s amazing how ‘once in a hundred year’ storms seem to occur every few years,” he chuckles.
Fairholme is a value fund which will invest in any security, regardless of market cap, in any sector or asset class.

“A dollar doesn’t know how it was earned,” he says “we will go up and down any given company’s capital structure as long as it holds value. Senior secured or unsecured debt, preferred shares, it’s all fair game, although we are primarily focused on equity, if bonds are giving equity-like returns plus safety, we’ll go there, too.”

He uses the health care sector as a case in point.

“The perception versus reality of the health care bill is that the administration and congress will destroy the health care system, causing pricing to fall off a cliff.”

His work says the opposite. “They can’t kill it,” he argues.

So he has invested heavily in the health care sector including Pfizer, which is his top holding.
Berkowitz’s style is to make big bets on companies while investing for the long term. It is a similar approach to Don Yacktman, of the Yacktman Funds, (see “Don Yacktman, a Manager for all markets”) who also happens to be one of the leading contenders for Morningstar’s fund manager of the decade, along with Berkowitz.

The Fairholme portfolio tends to hold 15 to 25 securities on average and his top five or six holdings often represent over half of the portfolio’s value historically.

“If you count cash in there,” he says,” it’s more like two thirds of the portfolio.”

What’s his thinking behind making such concentrated bets?

“Why should I buy my 20th best idea when I can put more money in my first or third best idea? Besides, how many companies can you realistically expect to follow? From my math days at the University of Massachusetts at Amherst, I remember one central tenant: when you own 30-40 securities you are approaching infinity and that will give you, at best, mediocre performance.”

Readers will be happy to know that Berkowitz disdains front and back end loads or any other kind of fee or kickback. He charges a flat 1% (see my column “It’s No Load or No Thanks” for more on these unethical charges).

“We’re trying to be like the private partnerships you read about that charge the investor 1/20—one percent management fee and 20% of the profits. We’re trying to be a 1/20 partnership without the 20.”

As for being selected as Morningstar’s fund manager of the year, he is honored, humbled and gives all the credit to his shareholders.

“Our shareholders number close to 300,000 now and they stayed with us during the tough times. Without them, a smart, long-term oriented shareholder base, we couldn’t do what we do.”

This year investors will also be offered an income version of the Fairholme Fund called the Fairholme Focused Income Fund (symbol FOCIX).

“In analyzing so many companies’ capital structures we’ve come upon some great opportunities in the fixed income areas. We will focus on these ideas in the new fund.”

So what are his forecasts for 2010?

“I don’t have the slightest idea. My predictions plus $2 might get me a cup of coffee somewhere. At Fairholme, we tend not to predict but to take advantage of stresses as they develop. That takes patience.”

He does believe there will definitely be further opportunities as the financial system continues to de-leverage and as interest rates go up.

“Companies are going to need money. Mistakes are going to be made. In the fixed income market, there will be great opportunities to protect existing wealth as well. One thing is for sure. There will always be another opportunity just around the corner if you have the patience and the cash to take advantage of it.”

“We look at book value to earnings, earnings surprise and revisions and relative strength,” explains David Lundgren, director of equities and research for this small cap value fund.

Lundgren has over 19 years experience in investment and was named one of the top 100 mutual fund managers in the country in 2006. He also manages two other funds for Hancock Horizon, according to the company: a value and a growth fund. Although the Burkenroad fund was down 25% last year it managed to beat its benchmark, the Russell 2000 small cap index by 9%, according to Lundgren. This year he has reclaimed those losses and then some, he says.

The fund confines its investments to Alabama, Florida, Georgia, Louisiana, Mississippi and Texas. On the surface, it would appear difficult to put together a track record of winners from that line-up, especially when competing with the internet age of high flying, low-priced, tech stocks. But Lundgren disagrees.
“Most business investment is focused on both the East and West Coasts. So a lot of our companies go unnoticed and we’re pretty good at unearthing value here. We’ve had close to 25 of our stocks acquired over the last eight years while the rest continue to produce solid earnings. Over time, Wall Street analysts recognize these companies; pick up coverage and institutions start owning them.”

That means price appreciation.

He says a lot of companies in the region are either industrial or energy related, especially in Louisiana and Texas, with a number of food companies in Mississippi and Alabama. There is also a significant auto manufacturing presence with a corresponding ripple affect on various sectors of the local economy. I asked him for a few examples.

“Take Amerisafe, Inc., a $300 million market cap provider of workers compensation insurance, it’s a great company that insures in hazardous areas like logging, oil and gas and agriculture with a solid management team,” says Lundgren, “or National Beverage Corporation, which is based in Florida and distributes off brands of cola like Shasta. It’s been a steady performer for us.”

Some of the research used in the Burkenroad Funds stock selection process is compiled by students from Tulane University and has been since 1993.

“About 100 MBAs and undergrads look for companies that are covered by five or less analysts on Wall Street. They tear apart the balance sheet, write really professional reports and then we screen them through a combination of quant, value, earnings and momentum,” Lundgren explained.

Morningstar indicates that although the fund’s A shares carry a load or sales charge, there is a no-load D share alternative (symbol HYBUX) although the expense ratio is somewhat high at 1.65% and it does have a 0.25% 12b-1 fee (see my column No Load or No Way).

“Well, he has to make a living, doesn’t he?” said one prospective client from North County who has been a long-time client of just such a manager.

“Sure, but there’s a difference between making a ‘living’ and highway robbery,” I said.

In my column “Mutual Fund Fees: Why should investors pay more than Institutions”, I revealed the unethical charges called 12b-1 fees. That’s the common practice among many advisors and brokers (including your own) of investing you in a mutual fund that will then kick back part of the expense each fund levees on shareholders. If, for example, The Unethical Investment Fund has a 1.00% fee, they will pay your advisor or planner a percentage of that as a commission for putting you into that particular fund and they will continue to do so for as long as you hold the fund. It is legal although it won’t show up in any of the statements they send to you every quarter. For many managers, we’re talking about a lot of extra fees each year that are coming out of your pocket; fees that are paid to the advisor, in addition to any management fee you are already paying them.

Above and beyond that backroom arrangement, sales charges are a common occurrence among financial services professionals. There are three main categories.

Front-end loaded funds require you to pay a fee when you purchase the fund. They are easily identified as “A” shares. If you put $1,000 into such a fund with a 5% front-end load, $50 will go into your broker’s or advisor’s pocket and $950 will be invested in the fund. Back-end loaded funds, or “B” shares, have deferred sales charges. If you sell a back-end load fund before a certain time frame, you pay a sales charge. For example, if you sell the fund in the first year you could pay a 5% charge, dropping to 4% in the second year, less in the third and finally ending in 5 to 7 years, when you won’t have to pay any charge at all.

The “C” share or level load fund is the final category. These funds won’t charge a front or back end load, but usually charge the highest annual expenses of the three share classes, including hefty 12b-1 fees (1.00% is the highest annual 12b-1 fee allowable by law). So if you own an A, B, or C share mutual fund, your broker has received a nice kickback, in addition to the annual management fee you may already be paying. What, you might ask, have you received in return?

Morningstar, the premier mutual fund rating service, did a survey of the performance of no-load funds versus load funds and found that no-load funds actually have a superior record to load funds over three and five years. That should make intuitive sense to most readers. Instead of paying your broker that 5%, you can buy that many more shares of the fund of your choice. These loads over as short a time period as three years can easily shave your returns by as much as 10%. On a $250,000 portfolio, that could mean $25,000.

But what is even more astounding to me is that no-load funds with equal, if not better performance, can easily be purchased either directly through a brokerage account or by simply instructing your broker, financial consultant or investment advisor to do so. Of course, most financial service professionals will argue that these loads and 12b-1 fees are the price you pay in exchange for their sage investment advice.
So how has their advice been working for you over the last ten years?

If you’re up 100% after these fees and charges since 1999, then I say “God Bless”.
But most of these loaded funds have at best been “market performers” and the market (e.g. the S&P 500 index) has actually lost money during the last decade. Some of the best mutual funds you can buy, with truly awesome track records, don’t need to offer sales incentives like loads or 12b-1 fees to convince people to buy them. These funds sell themselves because they have a strong track record. These are the funds that you should buy or insist your advisor buy for you.

So how can you discover what you are paying and what you should buy? Go to www.morningstar.com. At the top of their home page, enter the name of the fund you own or that your broker/advisor is recommending. The fund page will reveal a wealth of useful information, including all you need to know about sales charges under the “expenses” category on the horizontal gray bar.

Now that you are gaining an understanding of exactly how much it has and is costing you to hold these “A”, “B”, and “C” shares for, at best, market performance, what can you do? Either get out of mutual funds entirely and buy exchange traded funds which have fees as low as 0.30% and none of these questionable kick back practices, or if you still prefer mutual funds, then insist on no-load funds without 12b-1 kick-backs.

What matters to Don and his crew are stocks; stocks trading at a good price, with a good business and boasting a management that has a long term track record in deploying cash. As value mangers, stocks like that are not easy to find, but when they do, they invest heavily. If the price drops, they buy even more.

“We don’t want to have a Noah’s Ark approach to investing,” Mr. Yacktman explained, “the more one diversifies, the more your returns are going to approximate the returns of the S&P.”

He argues that “having too many investments is a function of not having done your homework, because if one really has conviction, then you concentrate those investments.”

Matching the S&P is not what Yacktman is about either. Both funds hold over 50% or more of their assets in their top ten holdings. How has that worked for him?

“My joy comes from looking at our ten year numbers,” he said,” We actually experienced a lost decade where the S&P is down about 1%, including income, and our funds are up 11.7% compounded annually year after year. Over ten years, that is a huge spread.”

He concedes that “every once in a while” he gets one wrong, but insists that rarely do they lose money on the investment.

“It’s a point of pride for us.”

He credits his son, Stephen, who started working for him in 1993, for much of that performance. “I would stack him up next to the best business analysts in America.”

So what is his take on the future?

“I’m worried about the economy and about what is going on in Washington,” he admits. “The Fed is walking a tightrope: low rates now to stimulate the economy, but once it starts to recover, there will be a lot of imbedded inflation, which will force rates up. How long that will take, however, I have no idea.”

This could mean volatile markets will be with us for some time, maybe a long time, but that doesn’t bother Yacktman.

“I welcome more volatility,” he says, “Volatility is the friend of a value manager. In that kind of environment we thrive.”

So how does he plan to handle that volatility?

“The best protection against the worst case, a collapse in the economy, is not gold, it’s stocks like Coca Cola with pricing power and a consistent cash flow,” he argues, referring to his list of investments.

Coke, Pepsi, Microsoft, Viacom, Pfizer, Newscorp, P&G, Comcast and Conoco are among his top ten holdings, according to the fund’s latest quarterly report. Recently, he bought H&R Block as well, according to Yacktman.

“In the past, they ‘de-worsified’ into some businesses that didn’t make any sense, now they have returned to their core business, tax preparation, which generates double digit returns. And I don’t see the tax code getting any simpler over the long term.”

Based on the information in both fund’s prospectuses. The symbol for the Yacktman Fund is YACKX, with an expense ratio of 0.95% and the Yacktman Focused Fund, YAFFX, with a bit higher expense at 1.35%. Neither fund has a front nor back end load and neither has a 12b-1 fee (a kickback to your broker, planner or money manager).

The argument from the little guy’s side is that they take the same risks as the big institutional investor, but their returns over time can be radically different because of the size of the fees they pay. As a purely fictitious example, let’s say Money Bags Capital Management invests a dollar and is charged a fee of 0.7% by Falafel Mutual Funds. Bill Schmick, an individual investor, invests the same dollar but is charged a 1.40% fee. The Falafel fund returns 8% a year for a decade generating $2.01 for Money Bags but poor Billy only receives $1.87. Is that fair, asks the plaintiffs?

From the institutional investor’s point of view; when you buy in bulk, no matter what you’re buying, you should get a discount. Mutual fund managers also argue that servicing the individual investor is more expensive since each account has to be processed; mailing costs are higher as is communicating with all these shareholders.

However, what no one appears willing to bring up is Rule 12b-1, which allows mutual fund advisers to make payments from fund assets for the costs of marketing and distribution of fund shares. These fees increase the expense that we the individual investors pay by a substantial amount. They can add anywhere from 0.30 to 0.50 basis points to a fund’s expense.

Back in 1980 when the rule was passed, the mutual fund industry claimed that these fees would help attract new shareholders into their funds through advertising and by providing incentives to brokers and others to market their funds. Since then, several variations of the theme have evolved, called “revenue-sharing arrangements” and “advisor paid fees”. Although some mutual fund companies do use these fees for legitimate marketing or advertising, in my opinion, most of these so-called fees and arrangements have evolved into nothing more than a kick-back to your broker, financial planner or money manger for using one fund family over another, regardless of performance, expenses or anything else but the lining of their own pockets. Sure, it’s legal but is it ethical?

A few years back, Lori Walsh, a financial economist at the Securities and Exchange Commission studied the costs and benefits to fund shareholders of 12b-1 plans. She concluded that the investor is never explicitly told the amount of 12b-1 fees they are paying. The information is usually buried in the fine print under “disclosures” that your advisor is required to give you. The study also found that these plans provide even less control over the amount that investors pay, and that these funds, unlike commissions or loads, are charged for as long as the investor remains in the fund and usually increases as their holding period increases.. In conclusion, she stated these fees also establish “conflicts of interest” between fund advisers and shareholders:

“Given the lack of evidence that these fees benefit shareholders in any other way, one has to question whether the level of 12b-1 fees is in the interest of shareholders.”

So what does this mean for you the investor who may, for example, have your money managed by an investment advisor for a fee, or a financial planner or broker who may charge you both a fee and commissions? If they are using mutual funds that participate in 12-b-1 fees or revenue-sharing (and 60% of all mutual funds including no load mutual funds do) then your ‘trusted’ advisor is also getting a direct kick-back from the mutual fund they have you invested in at your expense. To add insult to injury, many of these funds are poor performers compared with other funds that don’t provide a kick-back; so not only are you paying higher expenses but your performance suffers as well. The only one who wins is your advisor or broker who gets more and more of your money. What can you do about this? Find out what you are paying and why. If you find you have been unknowingly a victim of this practice, pull your money out and find a manger or broker who does not participate in these scams.

And as for the Supreme Court, if they really want to look at why expenses are so much higher for us individual investors, maybe they should start with 12b-1 fees.

Permanent Portfolio Family of Funds is a San Francisco-based mutual fund family with a formidable track record since its founding in 1982. Its flag ship fund, the Permanent Portfolio Fund, with $4.8 billion under management, has been ranked five stars by Morningstar, the mutual fund rating service, over 10, 5, 3 and 1 year.

It is considered a global conservative allocation fund, sometimes called a balanced fund. The fund invests a fixed percentage of its net assets in gold, silver, Swiss Franc assets, U.S. stocks, foreign real estate and natural resource stocks, aggressive growth stocks and dollar assets such as U.S. Treasury bonds and short-term corporate bonds.

“If you look at our asset classes on their own, they could be considered quite speculative,” says Michael Cuggino, the funds’ portfolio manager,” but taken together the six asset classes are relatively non-correlated and allows the portfolio to maintain a stable return.”

Investors have been rewarded over the years with that strategy since the fund has generated a 6.5 % rate of return since inception It lost less than most last year (down 8.4%) and is up 17% as of October 9 of this year.

Cuggino is a CPA and like his fund, is conservative with a balanced outlook on investments. He has 23 years of professional experience, 17 of which has been with the Permanent Portfolio. Traditionally his fund allocates 20% of its assets to gold, 5% to silver, 35% to U.S. Treasuries and corporate bonds, 15% to U.S. aggressive growth stocks, 10% to Swiss Franc assets and 15% to real estate and natural resource stocks.

“We have some leeway on those targets with a 10% range above and below those levels. We re-balance when things get too far out of wack, but re-balancing is a necessary evil for us because of the tax implications, so we manage it.”

Given the recent moves in both gold and silver, I asked him about his precious metals holdings. Is he in stocks, ETFs or futures?

“We can hold gold and silver in a number of ways, but we found holding bullion directly is easily understood by our investors and it allows us direct ownership.”

Given on-going worries over third party risk, his choice is understandable and may even prove the best investment option. Cuggino’s view of the market is instructive.

“Our fund is actually the antithesis of forecasting. Saying that however, I think commodity prices in general will continue to go up given the increasing amount of liquidity underway worldwide. Oil, metals, agriculture, gold, silver; commodities across the board will go up as the dollar weakens and world wide economies re-flate.”

As for the U.S. market and stocks in general, he has a positive attitude.

“My sense is we have room to go higher. I still like the communication and energy space, specifically we like Freeport-McMoran and tech companies like Hewlett Packard which derives more than 50% of its revenues from overseas markets.”

On the economy, he sees the cup as half full.

“Economic fundamentals are improving; I see expansion of multiples and higher stock prices based on earnings growth, although the strength of that will vary from sector to sector.”

He does see some significant head winds ahead so he is a bit wary right here in terms of fiscal policy, easy money and continued rising unemployment.

The fund’s symbol is PRPFX and its expense ratio is a quite reasonable 0.84%. Investors will also be pleased to note that there are no front or back end loads on the Permanent Portfolio Fund or the three other Permanent funds– a versatile bond, a Treasury bill and an aggressive growth fund.
Cuggino believes his fund is best suited for the conservative investor. One who is satisfied with “singles, and doubles with not many home runs but no strike outs either.”

Given the recent volatility in the markets, it sounds like a good, sensible strategy to me especially if you are approaching retirement. If you want to hear my interview with Michael Cuggino in full, click on Berkshiremm.com.

Last year, while the Dow Jones U.S. Financial Index fell 52% (compared to the S&P 500’s -37%) his fund declined a mere 7%. This year the fund is up 26% and he expects third quarter results for financial stocks to be “neutral to positive.”

“JP Morgan will probably beat,” he predicts, while he is looking for positive numbers out of Wells Fargo as well.

Given his years working at Chase Manhattan Bank, Burnham Securities, Tucker Anthony and Dain Rauscher, Inc., before founding Mendon Capital in 1996, Schutz had not only a deep understanding of the banking business but also of derivative products. He therefore saw the banking crisis coming.

“I avoided companies enjoying rapid growth based on esoteric products,” he explained.

“Since we are allowed to take up to a 25% short position in the fund, I shorted those types of companies.”

On the long side he bought well-capitalized companies and mortgage-backed REITS (real estate investment trusts) that held mortgage-backed securities issued by U.S. government-sponsored entities.

During the financial crisis, he had two huge redemptions but fortunately had the cash to meet them.

“It was a clear signal to me. Valuations were at extreme lows. As a fund manager, I seldom panic, blood was running in the streets and it was time to buy.”

It was March of this year. Schutz began to selectively purchase financial securities. He saw the Federal Stress Test for banks as an opportunity to load up on quality companies at a distressed price.

“I had a lot of cash at the time. Companies were looking to raise capital but in order to do that, they needed to make the terms very attractive to pull in buyers. I participated in that capital- raising throughout April, May and June, buying shares of JP Morgan, Bank of America and other high-quality companies.”

Now that the sector has rebounded substantially, where do financials go from here?

“I think this is a generational opportunity, particularly in the banking sector. The strong are getting stronger. Companies are earning money while the FDIC is still taking broken companies and handing them over to the healthy,” he argues. “Take JP Morgan, it came into this crisis with a $4-$4.15 earnings run rate. Post Bear Sterns and Washington Mutual, the run rate is probably $5.50-$6.00/share. Earnings are rising dramatically while valuations are still compelling.”

One reason he sees earnings climbing is that there is little competition from Wall Street in making loans and as a result spreads are widening. He sees this occurring among smaller companies as well, mentioning Berkshire Hills Bancorp Inc. (BHLB) and Chicopee Bancorp (CBNK) as two local companies with plenty of capital that are on his survivors list.

Schutz also runs a small cap financial fund (Burnham Financial Services Fund, symbol BURKX). Both funds have been given mutual fund rating service Morningstar’s top five star rating. Schutz is passionate about the opportunities he sees ahead. I go into more depth about that in our radio interview this Friday morning on “@theMarket with Bill Schmick” on Vox radio so don’t miss it. Or, if you do, you can always hear our podcast by going to www.Berkshiremm.com and click the radio button in the lower right hand corner.

Rated four star by Morningstar, the premier fund ranking agency, a $10,000 investment in Federated Market Opportunity at its inception date (12/04/2000) would have netted you $15, 243 compared to less than half that for the S&P500 by 2/28/09. Over the last 60 months, thanks to diversification, the fund has had a low correlation (.28) with the stock markets and paid a dividend in 2008 of .77 cents or 7.69 %.

FMAAX (the ticker symbol) for the $1.3 billion fund is not a bear fund although its charter has recently changed allowing the manager to short stocks. The manager focuses instead on absolute (positive) returns rather than relative performance. He invests in various asset classes and they buy and sell rather then buy and hold. This quarter 17% of the fund is long various currency forward contracts (particularly commodity currencies), plus emerging market bonds, and gold, energy and other commodity stocks. They use a contrarian value approach to investing.

For the last few months Lehman and Meissner have been waiting for a market rebound although they worry that the longer and lower the markets go the less powerful will be the bounce.

“The targets we’ve been using for markets, sectors and individual stocks continue to be the 200-day moving averages. For the S&P500 index, that currently would be about 1087, which is about a 41% move from here,” Lehman explained.

He believes that certain sectors like energy, commodity and precious metals can have even larger rebounds. Oil service, for example, could move up 80% from the distressed levels of today, he argues and energy prices reflect extraordinary pessimism. As a contrarian, those circumstances give him a buy signal.

“Energy is clearly a contrarian position, but the service, exploration and production sectors have technical, contrarian and valuation support. Many stocks are oversold and building impressive bases.”

Lehman points to stocks like Rowan Companies and ENSCO, which are selling at a discount to tangible book value with little or no debt. The fund managers believe oil should be well supported around $35/BBL. using 1.5 times finding costs of $20-25/BBL.as a reasonable level for existing production. In contrast, new production costs would be closer to $75/BBL. Like other energy bulls, they believe the present price of energy does not take into account the geopolitical risks, the future tightening of supple and demand or the general depletion of the world’s s energy reserves.

As for his cash position, he admits 40% is large but justified given the present economic conditions. Many investors give him a hard time for his high cash positions, he concedes, but given the declines investors have suffered in the past 16 months Lehman’s cash hoard has been a winning strategy.

“We favor cash and gold rather than the paper currencies of countries with overrated central bankers.”

Gold, he believes is in a bull market but he is buying gold stocks instead of bullion for two reasons: the charter of the fund prohibits buying of pure commodities, and he argues that gold is historically expensive compared to gold stocks. Two of his largest positions are in Yamana Gold and Goldcorp.

As a contrarian, he suspects the present low readings in consumer sentiment and the sharply oversold indexes indicate a big move upward is coming. However he believes the ultimate level of the S&P500 will be in the 500-600 range. Lehman sees some broad similarities between the markets today and those of 1929-32 where stocks plunged 48%, rebounded 48% and then declined another 46%. He points out a similar pattern appeared in Japan’s stock market from 1989 through 2003.

Here in the U.S., he contends, the stock market bubble process is not complete. “Major bull markets have begun when trailing long-term returns have been negative but returns today are far above that. And although valuations have improved they are still well above historic lows.”

As a result, he believes that the old buy and hold approach to investing is no longer viable when markets can make massive swings both up and down.

“The last 25 years of buy and hold strategies no longer apply,” he argues. In a Bear market it just doesn’t work. The investor’s problem is to identify managers who can think about the markets differently. That’s what we do best.”