Insights & Advice


Holding its Own in a Bear Market: The Federated Market Opportunity Fund (FMAAX)

There was a time when Steve Lehman was the lone bear in a building full of bulls. Now, he is one among many. The 51-year-old Lehman and P.M. Dana Meissner, 40, are about 40% in cash, long commodities companies and have been outperforming the indexes since September of last year.

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/ 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.”

Posted in A Few Dollars More, The Fund House