Are you wondering how to invest in mutual funds in today's crazy, volatile stock market? This Palm Valley fund's absolute return strategy has not only minimized damage from the market's Titanic imitation, it has eked out a gain.
The $139.5 million Palm Valley Capital Investor Fund (PVCMX) is in the elite minority of stock mutual funds that are not only beating the broad market this year but are actually up.
The secret to the fund's positive performance has nothing to do with exotic securities. Managers Eric Cinnamond and Jayme Wiggins are not hedging. The duo are not relying on alternative assets whose moves are the mirror opposite of most equities.
What then is their recipe for how to invest? It boils down to buying stocks, largely small caps, when they are out of favor. Then watching them return to favor. "Most of our holdings are small, mature, market leaders," Cinnamond said. "They've been through many business cycles. They're profitable. They have a pretty good balance sheet."
Mutual Funds: How To Invest
At times, while Cinnamond and Wiggins look for stocks that meet their criteria, they've had as much as 80% of their shareholders' money in cash.
As of March 31, 48% of their shareholders' money was in cash. Another 32% was in short-term Treasury bills. "This allows us to be opportunistic," said Cinnamond. "When we get fully invested, we can generate very attractive absolute returns for that business cycle."
Aiming for absolute returns is one key. "It means generating attractive positive returns over the full market cycle," Cinnamond said.
Another key, of course, is knowing which stocks to bet on for a rebound. For this fund, that tends to be equities that are out of favor. "We own precious-metal miners and energy companies," Cinnamond said. "Those stocks have done well recently. We've begun to reduce those asset-heavy names. We're currently finding more value in consumer-related companies. A year ago everyone loved consumer stocks. Today they hate them. We're typically buying where people, many other mutual funds, are selling. We're often contrarian."
Dividend Yield Around 8%
Coterra Energy resulted from the merger of Cimarex Energy and Cabot Oil & Gas.
One thing Cinnamond and Wiggins like about Coterra is its dividend. Including its variable dividend, dividend yield is around 8%, Cinnamond says. Like many commodity-oriented stocks, Coterra pays a variable dividend. Its payout adjusts, based on earnings.
Also like many of its rivals, Coterra has boosted its earnings by resisting the temptation to chase rising energy prices by expanding production, Cinnamond says. That would require plowing cash flow into additional rigs and other expenses. "The industry has found religion," Cinnamond said.
The price of natural gas is around $9 per thousand cubic feet. But Cinnamond and Wiggins doubt it can stay that high. But if it does, exploration and production companies will increase production. That would drive down prices, dampening profits, Cinnamond says.
Backroom Services
Amdocs provides business support system software to service providers in communications, media and financial services. Amdocs has helped make the Palm Valley portfolio one of the year's best performing mutual funds with a total return of about 14% so far, going into Wednesday.
The company's software performs back-office tasks. Many of those functions used to be provided by Cisco, Wiggins says. One example of a current service: if you want to limit the hours that your teenager can send text messages, Amdocs operates that service adjustment feature for some telecommunications companies' sites.
Clients rarely discard them, Wiggins says. Relatively few customers dropped their wireless plans or streaming services during the pandemic, he says. "Upside isn't huge from here," Wiggins said. "But there value keeps growing a little every quarter. It's the kind of consistent compounder that you can sit on as long as the valuation doesn't get too far away from you."
Alamos Gold Reserve's Replacement Value
Alamos Gold owns gold mines in Canada and Mexico. It has sites under development in Canada, the U.S. and Turkey.
The mining company is owned by fewer mutual funds now than a year ago: 343 vs. 372 as of March 31, according to analysis by MarketSmith. So it fits Capital Investors' strategy of liking small caps when they are out of favor.
Why are Cinnamond and Wiggins bullish about Alamos Gold's prospects? They value it on the replacement cost of its reserves.
Largely due to what they see as the understatement of Alamos' Island Gold mine in Ontario, one of the world's highest grade sites, Cinnamond and Wiggins value the company overall at $8.50 per share. They purchased near $6.90.
So they see room for current fair market value to rise.
By The Numbers
Palm Valley Capital Investors Fund is up 1.6% this year, going into Wednesday. The broad market in the form of the S&P 500 is down 16.81%. Small-cap value mutual funds tracked by Morningstar Direct averaged a 10.66% loss.
Over the past three years, the fund's average annual gain is 8.35% vs. 13.61% for the big-cap bogey and 10.73% for the fund's small-cap value peer group.
The fund's inception date was April 30, 2019. Cinnamond says actual and prospective shareholders should not think of the fund just in terms of a defensive safe haven during volatile times. "The strategy is Steady Eddie," he said. "It's the market that's crazy. It's all over the place. Our risk profile will not always be conservative. Investors often buy it for a defensive strategy. But when opportunities are present and we're getting paid to take risk, we will."
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.
