Insights & Advice

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Take a look at The Burnham Financial Industries Fund

Most days you’ll find Anton Schutz, the portfolio manager of the Burnham Financial Industries Fund (BURFX), in and around Rochester, N.Y. far from the canyons of Wall Street in lower Manhattan. It certainly hasn’t hurt his fund’s performance however, since it ranks among the top two percent of all U.S. equity funds this year, according to data compiled by Bloomberg.

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.

Posted in A Few Dollars More, Portfolio Advice, The Fund House