investing

CSC Small Cap Value Fund: Investing Like Buffett and Graham

This fund's manager pays homage to the two investing gurus by buying cheap and cheaper stocks.

Like Warren Buffett, Jeff Bronchick has an eye for bargains and the patience to wait for them to pay off. Bronchick, who runs CSC Small Cap Value Fund (symbol CSCSX), seeks to mimic not only Buffett’s investing style but also that of the late Benjamin Graham, considered the father of modern securities analysis.

Bronchick screens for two types of stocks. So-called Graham stocks are just flat-out cheap. They typically sell for big discounts to book value (assets minus liabilities) and other value measures. “Buffett stocks” are better companies with steady profit and sales growth and relatively favorable share prices. All the companies CSC buys are small or midsize, with up to $5 billion in market value.

After identifying candidates, Bronchick tries to understand the businesses and estimates what he thinks they’re worth. “We determine whether a company looks like a good business at a reasonable price or, in the case of lower-quality businesses, whether a stock is cheap enough to compensate for a company’s shortcomings,” he says.

Finally, Bronchick talks with the targeted companies’ executives, suppliers and competitors before he buys.

That careful process keeps the fund’s turnover rate at a modest 50%, implying that Bronchick holds a stock for an average of two years. In reality, he might hold a stock for up to ten years, adding to his position or trimming it depending on whether the stock’s market price rises or falls. Like Buffett, Bronchick believes that long-term thinking gives his investors a significant edge by keeping taxes and trading costs low. “We’ll own a company for a long time if the business continues to generate cash and management continues to execute,” he says.

Bronchick concentrates on his best ideas, investing in only about 30 stocks at any given time, with the top ten holdings usually representing about half of the portfolio.

So far this year, the fund has trounced its competition, earning 9.5% through May 31, compared with just 2.6% for the small-cap value category, according to Morningstar. The fund owes its strong performance to big bets on White Mountains Insurance Group and Alleghany Corp., both property-casualty insurers, along with financial-services provider Jefferies Group.

The market’s run-up earlier this year turned Bronchick cautious. “We’ve been reducing a number of positions that have done well and have netted out some cash,” he says. That should give the fund the ability to buy aggressively when prices are right.

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