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Jeff Auxier, Auxier Asset Management

Whether it's working his farm or running a mutual fund, he takes a cautious approach to risk.

Laura Lallos, 04/01/2009

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Jeff Auxier's second career as a successful hazelnut farmer isn't far removed from his day job.

The farm is outside Portland, Ore., near the end of the Oregon Trail, and Auxier Asset Management's small office is nearby. There, Auxier buries himself among trade journals covering sectors from banking to beverages, seven newspapers a day, and piles of 10Ks. He describes his typical day as a solitary "grind, reading as much as I can in eight to 10 hours" to find consistent businesses with solid fundamentals and little debt.

His experience farming echoes his investing criteria: "You get a huge appreciation for the risk of commodities," he says. "We run debt-free because of the respect I have for how quickly things can change."

Buffett Takes a Call
After graduating from the University of Oregon with a finance degree in 1981, Auxier was set to get an MBA and head to New York to embark on a more conventional investing career. He says that he changed his mind after a call to his hero, Warren Buffett, "who would not know who I am today, but who kindly took the call." Auxier decided to stay local and focus on finding value-priced companies that Wall Street "despised." He started his career as a retail broker, then a separate account manager at Smith Barney, before founding Auxier Asset Management in 1998. He is guided by the classic Buffett nugget: First and foremost, never lose your principal. "I sailed through '83, '87, and the tech downturn [in 2000-2002] thanks to following Buffett's advice," Auxier says.

Auxier Focus Fund AUXFX has held up relatively well during the current bear market, too. A 25% one-year loss through January puts it in the top-quartile of moderate-allocation funds tracked by Morningstar--and 13 points ahead of the S&P 500, which Auxier uses as his benchmark. Although Morningstar classifies the fund as moderate-allocation, Auxier considers himself an equity investor, first and foremost. The fund's current 30% stake in cash and bonds reflects his conviction that corporate bonds at current yields are safer bets than the stock market--and that stock valuations are still too high.PAGEBREAK

Auxier is most enthusiastic about the "dull and mundane: companies offering better values and understandable products," he says. Discount retailers Wal-Mart WMT and Costco COST are the obvious destinations for retrenching consumers in a recession. Customers will also likely continue to buy the products of Coca-Cola KO and Philip Morris PM, "which did well in past deleveragings in the 1920s and 1930s."

That said, Auxier is not excited enough to hold stakes much larger than 2% at today's prices. "When Philip Morris was at eight times earnings, as in 1987, then it was OK to concentrate," Auxier says. "In the 1980s, food stocks were at four or five times earnings! I'm not as comfortable at 12 or 15 times earnings."

Even bargain prices won't make auto or airline stocks attractive to Auxier; too many wild cards affect such industries. After low price multiples and lots of free cash, Auxier seeks predictability. "We want to compound client money consistently, so we look for businesses with high degrees of consistency without gimmicks." He offers Paychex PAYX, the payroll processing outsourcer, as a sterling example. "Customers are not going to change providers," he says. Auxier admits that Paychex is dependent upon small businesses as customers, many of which are being hard hit in this economic downturn. He doesn't plan to take a bigger position until the fundamentals are better. Then again, "the other argument is that this is the time to buy Paychex, in the depths of a recession," he says.

Two Sides to Every Story
Auxier readily admits "the other hand" for many of the stocks in his portfolio. Top-10 holding Nike NKE has done an exemplary job consistently building a presence in a global economy and is a "free-cash-flow machine." Of course, pricey brand names are often the first to fall in a recession. "One-hundred-dollar basketball shoes? That's my worry," concedes Auxier. This self-styled "humility" has led him to keep tiny positions in stocks no longer worthy of a meaningful place in the portfolio, such as Washington Mutual WAMUQ, which he cut back to 20 basis points of the portfolio at the beginning of 2008. "We sold a lot in 2006 because it was too aggressive with its acquisitions, and then sold more at $42," he says. "Still, we wanted to keep a tracking amount."

Bruce Stoltenberg of Soundview Advisors in Olympia, Wash., appreciates Auxier's ability to see both sides. "Auxier is humble. It's an odd blend, but you want a money manager with a big enough ego to have conviction but the humility to admit mistakes."

Mark Galloway of Galloway Asset Management in Mesa, Ariz., finds Auxier's straightforwardness reassuring. "He's been on the phone with investors weekly during the crisis, and he'll say, 'I screwed up. I'm going to try this.' He is honest about the good, the bad, and the ugly."

Advisor Tom Poehling believes that Auxier's approach dovetails with his own desire to limit volatility so that skittish clients don't abandon the market at the bottom. His Web site for Poehling Capital Management, based in Madison, Wis., is a paean to the likes of Buffett and Benjamin Graham. Poehling says that Auxier does "exactly what we believe in. Jeff doesn't overpay; he wants the right company at the right price. He also avoided financials for the most part and lowered the fund's concentration at the right time."PAGEBREAK

Investments in Education
Auxier's caution doesn't preclude bucking the conventional wisdom. Some of the fund's best performers recently are education stocks that he bought several years ago when they were foundering in a strong economy, when going back to school was a less attractive option. "When Apollo APOL (which runs the University of Phoenix and is the largest for-profit education company) went from $85 to $36 in 2006, I went down to meet management and was convinced they could turn the ship around," he says. Indeed, the stock was back in the $80-range in February. Small-cap Universal Technical Institute UTI hasn't performed as well, but the trade school operator "generates a lot of cash and is debt-free, and the demand for the diesel mechanics it trains is five to one."

One of Auxier's most prescient picks was ITT Educational Services ESI, which has returned 60% over the past year through Feb. 19. He bought near its low, at a time when lawsuits alleged that the school's advertised job placement and retention rates were misleading. "There was a perceived scandal," Auxier says, "but I met face to face with management and was convinced that they were of the highest integrity. They were masters of the business and had good operating margins. I just wish I had bought more." Tightening credit for private student loans has been a recent threat, however. "Money has loosened, but you should be suspicious of anything tied to a credit cycle," Auxier warns with typical prudence. That said, he expects Obama's stimulus plan to boost financial aid.

Auxier does not always display such brilliant timing, but he will stand firm and buy on the way down. One example is Zimmer Holdings ZMH, manufacturer of orthopedic hip and knee implants. "I thought it was pretty cheap at $66, but I was wrong." Concerns that possible Medicare reimbursement cutbacks could affect Zimmer's pricing have hurt the stock over the past year, but Auxier sees an innovative, global business with high free cash flow and low costs, and he has added to his stake. As for Philip Morris, that classic recession-resistant stalwart, "I would buy, and buy, and buy if I had unlimited funds." Investors can count on Auxier not to get carried away, of course, given his constant cash stake.

Not Perfect
Although that cushion has no doubt proved a comfort to shareholders in the current turmoil, this fund is unlikely to soar when the market eventually rebounds. Auxier says that his goal is to "beat the market on down markets, and match it on up markets." Despite its name, this fund isn't for investors looking for a stock-picker willing to stake significant bets on compelling picks; less than 20% of assets were in the fund's top 10 picks at year-end. Moreover, the 120-stock portfolio contains bits and pieces that might not have much impact on performance, but they do seem to represent a departure from the Buffett way. There's that lingering tracking position in Washington Mutual, for example, and a tiny stake in iShares MSCI Germany Index EWG, which Auxier bought in 2003 when the index was priced at less than 10 times earnings.

Some advisors might also be put off by the fact that Auxier prefers to go it alone. "Even better investors gravitate toward other things when they have a large staff, and no one is really on the pulse," he asserts. "When I have had a number of analysts underneath me, the performance was not as good." Galloway likes knowing that Auxier is making the decisions on his own, rather than entrusting them to "some young MBA straight out of school."

Stoltenberg considers Auxier's lack of support "a negative, but not fatal. We like to feel that we can buy a fund and hold it for 20 years. You could buy an American Fund and hold it forever, but Jeff has been as consistent as any fund we've owned." Stoltenberg also appreciates the flexibility that has helped this fund bear up in down markets, and he considers the 1.35% expense ratio fair given an asset base of only $79 million.

The fund's biggest appeal may be that it provides as much excitement as many clients can handle right now. Poehling puts Auxier in a class with Christopher Davis and Bruce Berkowitz, but those managers have hefty stakes in their top picks. Auxier does share their enthusiasm about current investment opportunities: "It is so rare to have a chance like this. If people can get over their emotions, the next 12 to 18 months are going to be an exciting time for shopping."

It is safe to say, however, that he won't bet the farm.

Laura Lallos, a former Morningstar analyst and editor, is a frequent contributor to the magazine. 

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