You won't like the Osterweis fund if you are a member of People for the Ethical Treatment of Animals. Its top holding is the stock of Charles River Laboratories, which produces mice, rats and other test rodents used in medical research. Although Charles Rivers is an obscure small-company stock, you also will find shares of well-known names like Nestleacute; and Johnson & Johnson in this fund's svelte and eclectic portfolio.
John Osterweis, manager of the fund that carries his name, is tough to nail down to one type of stock or investing style. His is a go-anywhere fund that shifts its investments based on where he and his team of eight portfolio managers and analysts find opportunities. His picks have produced in the past. The San Francisco-based fund returned an annualized 14% over the past decade to October 2, about five percentage points better than the average fund that invests in stocks of all sizes.
Even though the fund holds a hodge-podge of stocks, the portfolio has a common theme: Osterweis zeroes in on beaten-down shares of companies that generate cash over and above what's required to sustain operations, known as free cash flow. He also evaluates management's potential to improve the company and produce more earnings year after year.
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WebSense typifies Osterweis' approach to stock-picking lately. The $1.2 billion San Diego firm sells large companies software that blocks Internet pornography and other online distractions from corporate networks. Customers have to pay a subscription fee to use WebSense software, which means the company gains a steady flow of cash as subscribers pay. He thinks WebSense can expand by selling its products to smaller companies, convincing wireless providers to use WebSense filters on mobile phones and developing more security software for corporate networks. Osterweis bought shares of WebSense when the stock dropped after the company missed analyst quarterly earnings expectations. He increased the funds stake in mid-October. The stock (symbol WBSN), $27 on November 2, has dropped 19% so far this year from a high of $33.54.
The free-wheeling nature of the Osterweis fund makes it hard to benchmark. "The problem with benchmarks is that we could be a mid-cap growth fund one year and a large-cap value fund three years down the road," he says. With private clients, Osterweis uses the Standard & Poor's 500-stock index as a yardstick for performance. His firm manages $3 billion, which includes the $290 million in his eponymous fund and $64 million in Osterweis Strategic Income, a bond fund.
Considering the fund's chameleon-like changes, Osterweis doesn't trade that frequently. The fund typically holds stocks for three years. Osterweis will sell if the stock is overpriced, he loses confidence in management or the fundamentals deteriorate. "The fact that a company has a slow quarter to us is not a disappointment," he says.
The Osterweis fund holds about 40 stocks. With such a small number of picks, the current portfolio has surprisingly broad mix of small-, medium- and large-company stocks. Mortgage real estate investment trust Annaly Capital Management (NLY) and the electric utility FPL Group (FPL) have been among the fund's best earners this year. But if Osterweis selected picks fall out of favor with the market, this fund will suffer more than its peers. In fact, the Osterweis fund lags the average all-cap fund in the past 12 months to October 2.
Osterweis, who started his fund in 1993, has proven he can hold his own in both up and down cycles. In 2002, the fund (OSTFX, 866-236-0050) only lost 12%, while the average all-cap fund fell 22% that year. Osterweis charges 1.26% annually for expenses, which is less than the 1.59% fee charged by its average peer. While this fund won't win any friends in the animal rights crowd, its strategy has been nimble enough to navigate the market maze to earn patient investors some cheddar.
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