Balanced Buys for Stable Growth

12/19/2014 10:00 am EST

Focus: FUNDS

Tom Sudyka, portfolio manager at the LK Balanced Fund, seeks stability and growth through a mix of bonds and quality stocks. Here, he looks at four favorite equities; a railroad, a media firm, a healthcare giant, and a leading technology outfit. 

Steven Halpern:  Our guest today is Tom Sudyka, portfolio manager of the LK Balanced Fund and president of Lawson Kroeker Investment Management.  How are you doing today, Tom?

Tom Sudyka:  I’m great, thank you.

Steven Halpern:  Well, thank you so much for joining us.  The LK Balanced Fund (LKBLX) has been a top performer over the past decade.  Can you tell our listeners a little about the fund and its long-term investment goals?  

Tom Sudyka: The LK Balanced Fund is a successor to a partnership that Lawson Kroeker ran—has run for 28 years now—and it’s a straightforward balanced product, and by balanced we mean it—at all times—it holds equities and fixed income securities.  

Historically, that balance has been targeted around a 60% equity, 40% bond target and it has vacillated somewhere between 50% and 70% equities over the past 28 years—currently sitting around 65% equities—because we think the equity markets offer better long-term potential today than maybe the fixed income side does.  

The long-term goal of the fund would be to provide stability of growth, but while providing growth—more stability than an all equity fund would have—of course.

Steven Halpern:  Now, given the market’s volatility, particularly the volatility in such areas as energy and some global challenges, I would think this is a particularly good time for investors to consider a balanced fund.  Would you agree with that?  

Tom Sudyka:  I would agree with that.  I mean, what’s going on in the equity markets today is largely macro driven.  As you mentioned, it’s oil prices falling to five year lows, and, as of today, at least, no end in sight, and that has created remarkable volatility.  

The fixed index is way up on the stock side, and while that goes on, obviously, the equity portion of a balanced fund has become somewhat more volatile, but the bond portion has that effect of dampening the volatility of the investor’s long-term holding.  

We think that by being in a balanced fund and letting the manger make the decision when to move money between stocks and bonds takes the risk element out for the individual investor and it keeps them invested better for the long-term. Volatility tends to take investors out of the market.  

They run from the risk of it all and a balanced product tends to keep them in, and being in the markets for long-term has proved beneficial.

Steven Halpern:  So, let’s look at a few stocks that will give our listeners a good sense of your long-term investment strategy.  First, you highlight Kansas City Southern (KSU).  What’s the attraction there?

Tom Sudyka:  Yeah, Kansas City Southern is a class one railroad that has rail lines running from the north/south part of—from the north to the south of the United States—and then down into Mexico.  

What attracts us to these guys is they’re one of the—well, they are the only—US domiciled railroad with rights to go into Mexico and so they ship goods that come into Mexican ports from Asia and into the west coast of Mexico.


They put it on their trains.  They run it up into Texas and they distribute it throughout the United States at a far cheaper rate than the east/west lines can get the goods in from Los Angeles to the other California ports and so this gives them a cost advantage.  

It gives them an advantage in sourcing goods and so their revenue growth has been historically a little bit better than the other railroads and that has translated into better earnings growth.  It’s the kind of company with just an inherent competitive advantage that we like to own.

Steven Halpern:  You’re also a fan of the theme park and media company, Disney (DIS).  What do you like there?

Tom Sudyka:  Oh, Disney is you mentioned, is a fabulous media conglomerate.  What’s not to like about Disney?  

It is more than theme parks.  It is primarily driven anymore by their media holdings and their ability to be a fully integrated producer all the way out to distributor of their product makes them just the juggernaut in the industry.  

It trades at about a market multiple but it has a far better portfolio of assets and growth rate than the market would, and so, to us, that’s just kind of a nice core long-term holding.

Steven Halpern:  In the healthcare sector, you point to Johnson & Johnson (JNJ).  Could you share your thoughts on that company?

Tom Sudyka:  Yeah, Johnson & Johnson kind of falls into the Disney category. Here you’re talking about the leader in most healthcare industries.

It’s just such a juggernaut that—when you’re going to look at your healthcare securities—which ones do you want to own and here you get broad exposure to most sectors of the healthcare industry.  

Again, you’re talking about a stock that trades around the market multiple, growing it faster, way faster than the market and with great growth prospects ahead of it.  To us that’s...if you’re going to look at the healthcare you start with the best and to us it is the best so we’ve stopped there.  

Steven Halpern:  Finally, within technology, you like Microsoft (MSFT).  What do you find attractive in that situation?  

Tom Sudyka:  What we like about Microsoft is that it’s kind of the unloved tech company.  Their efforts have historically—obviously, they dominate the commercial software business, but their shift to their third-ever CEO or operator of the company now—and they’re moving their strategy to a mobile first and the cloud first away from just being a software company and we think that those efforts will pay off.  

Here’s a company that trades at less than a market multiple and yet its revenue and earnings growth are much higher.  Their revenue is growing in the mid-teens, earnings even faster.

And so it’s a cheap stock, with a nice dividend in addition, and can and should eventually be realized for what it is, which is, obviously, an industry leader, but should be assigned a higher multiple and the stock should continue to appreciate.

Steven Halpern:  Well, we really appreciate you taking the time today.  Thank you so much for joining us.

Tom Sudyka:  Thanks for having me.

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