This Small Cap is Printing Gains

03/01/2012 6:30 am EST


Asset manager George Young describes his fund’s approach to investing in equities and fixed income. He also shares why it’s so crucial to keep emotions out of the investing process.

Kate Stalter: Today, I am speaking with George Young of the Villere Balanced Fund (VILLX).

George, we spoke several months ago, in the second half of last year. Since then, there’s been a lot of volatility in the markets, and then a rally in the equity markets. So give us not only your investment philosophy, but also where you see the markets headed at this point.

George Young: I think it’s very important to take a long-term view of the market. And nobody likes volatility, but everybody wants to make money. Everybody wants what they can’t have.

So I think it’s important to remain objective and to take emotions out. Find companies that you like, stick with them for the long term, and hopefully you’ll get some dividends and some good growth over time.

Kate Stalter: How do you, through your fund, approach the market at this juncture?

George Young: We’ve always been very interested in small- and mid-cap companies. We think that’s where the growth is; that’s where the money can be made. And we specifically focus on the US economy, which you could say it’s a little bit of luck, but I think there’s a bit of skill. We stick to what we know, and I think that’s a good lesson for all investors.

You want to buy what you know, you want to buy what you can understand, and if you stick with something like that, it should help over time. It’ll avoid problems—emotional problems, where maybe you’re down 5%, maybe you’re down 10%—but if you can stay with an investment longer-term, it becomes a true investment and it’s not gambling. That’s what you want to avoid.

Kate Stalter: Obviously, whatever you’re doing here is working. I was looking at the Morningstar data for your fund, and you have a tremendous track record going back ten years through now. What is the philosophy in terms of the Balanced Fund itself? What does that imply?

George Young: Well, it’s important that we have 25% of our assets under management in bonds. We don’t think bonds, at this moment, are going to make a lot of money, but they do allow you to sleep at night. That’s very important for investors, because obviously, a given investor may have his IRA money in there; he may have his 401(k) money in our fund; he may have his child’s education money in there.

So although you want to grow, you also want to have some of your assets that are in safe investments, and bond yields are particularly low now. But on the other hand, if you have got 25% in bonds, you’ll be able to rest easy at night, and I think that’s also very important.

Kate Stalter: Talk about some of the holdings, both on the fixed income and equity side.

George Young: Sure. One thing good about our fund: I mentioned we have to have 25% in bonds in Villere Balanced Fund; that’s the name of our fund.

Of that 25%, we can have 10% in high-yield bonds. Some people call them junk bonds, but they’re bonds that we own that we feel we know well. And yes, they’ve been somewhat volatile, given the last few years, but for the most part they’ve done quite well. And that’s something that is very important for our investors, long-term.

Now if we switch to the equities side, we focus, as I said before, on small-cap, domestic-oriented equities. We do have Apple (AAPL) in there—I have to admit, a large-cap stock.

But the one that I think is important to focus on today is 3D Systems (DDD). They are in the business of 3D printing, and what that means is that if you can imagine something, it’s something you’ll be able to design it and build it. So think of Invisalign braces; think of prosthetics; think of car parts; think of designing next year’s Ford (F), the newest model for Ford automotive company.

You can design that, and within a couple hours, you can have that object in your hands. It can create something the size of one cubic foot and a little bit bigger than that. So it’s a great opportunity to design and build the object over time.

Kate Stalter: I’m looking at the chart of that one as we’re speaking, and I see that that one has shown some nice performance in recent weeks.

George Young: Well not coincidentally, it’s up about 15% today, so that’s good news for us. But we’ve been a long-term owner of this stock, and again, it goes back to that theme. You want to own stocks for a long period of time, if you’re able to persevere and you’re able to be objective about your investments. You should do well.

Kate Stalter: Looking ahead, for individual investors who are listening to this, who manage their own portfolios: What would you suggest that they pay special attention to at this moment, George?

George Young: Well, I think it’s important to look at what’s being out of favor and likely, over time, there’s a regression to the mean. It means that things that were out of favor will be back in favor.

So for instance, Bank of America (BAC). Everybody hated Bank of America last year, and there was good reason to hate it. But on the other hand, if you look and see what’s done well in the first two months of this year, Bank of America and other financials like them have done quite well, and I think that’s going to be the theme for this year.

Utilities were big performers last year. They probably won’t do as well this year, but I think there’s a good chance that interest rates will go up. So look at those things that are out of favor, and not specifically Bank of America, but I think that’s kind of the poster child for separating emotions from objective investing.

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