By David K. Randall
NEW YORK, April 26 (Reuters) – The best performance of any
U.S. mutual fund in the first quarter was turned in by a
father-and-son team swapping phone calls between South Florida
and Northeast Pennsylvania.
Joseph R. Biondo – who goes by Joe – and his son, Joseph P.
Biondo, manage the Biondo Focus Fund, which has $23
million in assets. Their fund returned 39.7 percent over the
first three months of this year, a full 8.6 percentage points
more than its closest competitor, the $8.4 billion Fairholme
fund managed by famed investor Bruce Berkowitz,
according to Morningstar data.
The broad Standard & Poor’s 500 Index, the benchmark for
most mutual funds, returned 12 percent over the same time.
The Biondos attribute their strong performance to a
willingness to take concentrated positions and wait for the
market to turn in their favor. The fund holds just 19 stocks
while the average stock fund holds 182 companies, according to
Morningstar. Factbox on top holdings
“We believe in letting our winners run,” Joe Biondo said.
“Out of all the 19, not all will work out and we’ll have to cut
bait. But at the end of the year, 15 or 16 of the names will
still be there.”
Its performance capped a quarter in which other focus funds
– those non-diversified portfolios that typically take large
stakes and hold fewer than two dozen companies – outperformed
nearly all of their peers.
Fairholme returned 31.1 percent on the strength of its
portfolio of 15 companies, while the $42 million Berkshire Focus
fund, concentrated on technology, returned 28.4
percent with its portfolio of 29 companies. All told, four of
the 10 top-performing stock funds took highly concentrated
stakes in companies.
When managers pick winners, these large positions can lead
to big gains. But the high concentration can leave investors’
dollars exposed to one ill-timed bet or unforeseen hiccup with
little to cushion the damage. “Any manager who is this willing
to make concentrated, contrarian bets will look foolish from
time to time,” noted Kevin McDevitt, a fund analyst at
Morningstar.
The performance of the Biondo Focus Fund in the two years
since its creation illustrates that its strategy can be hit or
miss. The fund has returned an average of 2.8 percent over the
eight quarters of its existence. The S&P; 500, meanwhile,
returned 3.4 percent over the same time.
Those averages smooth out quarters when the fund diverged
widely from the S&P; 500. In the first quarter of 2011, the
Biondo fund returned 14.6 percent, compared with a 5.9 percent
gain in the S&P; index. In the fourth quarter of the same year,
the Biondo fund fell 10 percent while the S&P; 500 gained 12
percent.
The Biondos say that investors who put money into their fund
know the risks of their approach.
“We try to do a good job of educating any investors that
what we’re trying to accomplish is very high returns, and one of
the drawbacks is periods of underperformance as well. Most
advisers we work with understand that and will only allocate a
certain amount of their client’s assets,” said Joseph P. Biondo,
the son.
Joe Biondo began working on Wall Street in 1962 with Loeb
Rhoades, a predecessor firm of Smith Barney. Joseph, his son,
started his career with Prudential Securities in 1997 after
graduating from the Wharton School at the University of
Pennsylvania.
The pair began comanaging separately managed accounts 12
years ago, and launched their fund to follow the same strategy
they’ve been following for the past six and a half years for
their private clients. Joe now works out of an office in Naples,
Florida, while his son remains in Milford, Pennsylvania, a tiny
town just across the Delaware River from New Jersey.
When evaluating stocks, they first look for growth companies
with “disruptive technologies,” said Joe. One example: Intuitive
Surgical, which manufactures instruments used in
robotic surgery. “We think that this is really interesting
technology that could change the face of open heart procedures,”
said Joseph.
The fund began buying shares in the company in 2003 when
they were priced at $16. Intuitive Surgical now trades at $575
and is up 57 percent over the past 12 months.
Another health care company, Mako Surgical Corp,
makes up the fund’s fourth-largest position with 10.7 percent of
assets. The company, which markets devices that provide
computerized assistance for knee and hip surgeries, is up 48
percent since the start of the year.
Joe Biondo expects the fund to hold the company for years,
even if the share price slips in the meantime. “It could be a
couple of years before they really start making money. But once
the machine placements ramp up, then you’ll be in the business
of selling razor blades to the disposable market,” he said.
Not all of the fund’s holdings are so specialized. The
Biondos have 5.5 percent of assets in Ford Motor Co
because they like its growth rate overseas, and 7.8 percent of
assets in MasterCard because they think the use of credit
cards will continue to grow in Asia and Africa. Apple,
another technology company expanding into new markets, is the
fund’s third largest position with nearly 11 percent of assets.
Perhaps surprising for a fund focused on new technology and
markets, the Biondo’s largest holding, 20.4 percent of assets,
is a stake in JP Morgan Chase through warrants that
expire in 2018.
“This is a really long term play on what we believe is the
healthiest bank in America. We feel very confident in having
six-and-change more years with Jamie Dimon at the helm,” said
Joseph. The company will continue to do well once the economy
begins to return to normal and the housing market clears up, he
said.
As one might expect with such a small portfolio, the Biondos
feel an emotional connection to each of their 19 companies.
Their recent strong performance doesn’t worry them that their
style, or companies, have peaked.
“We’re happy owning something for 20 years,” Joe Biondo
said.
(Editing by Walden Siew, Phil Berlowitz)
