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Seeking Balance: A Bottoms-Up Strategy
08/25/2014 10:00 am EST
By focusing on stock specific ideas, portfolio manager Thomas Sudyka keeps his LK Balanced Fund well-positioned for long-term gains whether the market faces rising rates or deflation. Here, he explains his strategy and highlights a trio of attractive equities.
Steven Halpern: Our guest today is Tom Sudyka, portfolio manager of the LK Balanced Fund (LKBLX) and president of Omaha-based Lawson Kroeker Investment Management. How are you going today, Tom?
Thomas Sudyka: Great, Steven, thank you.
Steven Halpern: The LK Balanced Fund has outperformed its Morningstar peer group year-to-date as well as over the past one, five, and ten years. Can you tell our listeners a little bit about the fund and its long-term investment goals?
Thomas Sudyka: Sure, Steven. The LK Balanced Fund is—as its name implies—a balanced fund comprised of a focused mix of stock and bond holdings. We manage the fund for a long-term appreciation, but believe we can reduce the overall volatility to shareholders by maintaining the fixed income exposure at all times.
We spend most of our time identifying or trying to identify corporations whose businesses and outlook make them attractive, long-term holdings. As you mentioned, this approach has been successful not just over the near term, but longer-term like ten and 15 years; periods where we try to focus.
The fund itself is actually a successor to a partnership that's been around as long as the firm, about 27 years. Currently, the fund is about 60% invested in stocks with the balance in bonds and cash.
Steven Halpern: Interestingly, you note that in the current environment, it's particularly difficult to have a strong conviction in most of the outlooks on Wall Street. Can you expand on that?
Thomas Sudyka: Sure, when investors look at an investment, we think they have a view or scenario of how they think the investment will play out given where they think—or what they think—might occur in the world; their worldview, if you will.
At Lawson Kroeker, we do not have a great conviction in any of the possible scenarios or worldviews that we can come up with. This lack of a firm conviction, from a top-down perspective, keeps our efforts focused on investment-specific attributes of individual securities. We feel this bottom-up approach leads to better long-term success.
Steven Halpern: You also note that with the end of quantitative easing we could see rising short-term interest rates while, at the same time, you remain aware of the risks of deflation. Can you explain those contrasting views?
Thomas Sudyka: Yes, Steven. We feel—like most economists do—that the Federal Reserve various QE programs have kept short-term interest rates at artificially low levels. As QE is phased out, it's possible—but certainly not a guarantee—that we can see rising short-term rates.
Deflation—or a general decline in the price level—is sometimes the result of a lack of demand. If economic growth stalls, or if major purchasers-think China-slow their demand for a variety of items, deflation would likely unfold.
Again, going back to your prior question, we have difficulty being a firm proponent of any one scenario we might contrive and therefore, prefer our investment approach focusing on individual security selection and analysis.
Steven Halpern: With a balanced fund, you're really well-positioned whether or not the outlook becomes higher inflation or deflation?
Thomas Sudyka: Exactly, we try to position the portfolio to handle both because we're not exactly sure which one will unfold.
Steven Halpern: Let's look at some representative holdings in the LK Balanced Fund so that our listeners could have a better idea of the types of stocks that you find attractive. Can you share your thoughts on Chicago Bridge & Iron (CBI)?
Thomas Sudyka: Sure, Chicago Bridge & Iron is one of the world's leading engineering construction firms. Its focus is primarily on energy infrastructure. It's a $6.5 billion market cap company with around a $32 billion backlog, which is about three years of sales.
The stock has recently declined due to accounting allegations from a small research firm. We think it's a buying opportunity, trading at 12 times earnings and growing those earnings at low double-digit rates. It certainly looks cheaper than the S&P at around 19 times earnings.
Steven Halpern: A lesser known company that you like is called Costamare (CMRE), a dividend-paying shipping company. Could you tell us a little about this?
Thomas Sudyka: Yes, sure, Costamare is a perfect example of our long-term approach. The company is building and buying containerships in a depressed market. Company management has exhibited a disciplined approach to its slate expansion and has the financial strength not only to survive the current market downturn, but expand through it.
We don't have a particularly strong conviction as to when shipping rates will improve, but the company pays a nice dividend, currently slightly over 5%. When shipping rates turn up, this could be a big winner.
Steven Halpern: Finally, you point to a company called Texas Pacific Land Trust (TPL), which is a unique outfit and a rather fascinating company that's been around since the 1880s. Can you tell our listeners a little bit about Texas Pacific?
Thomas Sudyka: Yes, Texas Pacific is a publicly traded entity that is using its cash flow to buyback its outstanding shares. It's been doing this for well over a century. The trust currently holds just under a million acres of land in West Texas and holds oil and gas royalty interests on additional acreage where it's already sold the surface rights.
As you might surmise, there is oil and gas under their land and they've done a magnificent job of simply collecting the royalties and repurchasing shares with the cash flow. We are a big proponent of companies sticking to what they know. In this case, the company and employees seem singularly focused.
Growth for investment like this has been and may continue to be very lumpy, primarily, because the market can't forecast when they might sell some of their land and accelerate their share repurchases. We like the uniqueness of the situation and have been holders and buyers for around eight years now.
Steven Halpern: Thank you very much for taking the time today and sharing your ideas.
Thomas Sudyka: Thanks for having me, Steve.
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