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Jay Sekelsky, Madison Investment Advisors

Jay Sekelsky took a calculated risk by quitting his job at a fund industry giant to work at a quaint shop in the Midwest.

Wenli Tan and Lawrence Jones, 11/03/2008

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Many stock-pickers who are steeled against the vicissitudes of the market might nonetheless shudder at the thought of venturing away from a financial capital on the East Coast. Madison Investment Advisors' Jay Sekelsky, though, jumped at the chance.

On the same day in January 1990 that he received word of a promotion at esteemed Boston-based asset manager Wellington Management Co., he announced that he would depart the firm to work at a 10-person, unproven operation in Madison, Wis., that ran less than $300 million. Moving from one of the epicenters of asset management to a heavily wooded, quiet college town might be difficult for some, but not Sekelsky, who hasn't looked back since.

Learn by Doing
Though not a native, Sekelsky called the Badger State home for much of his childhood. And it was there where the manager's passion for investing firmly took root. Armed with a degree in accounting from the University of Wisconsin-Madison, Sekelsky enrolled in Wisconsin's renowned Applied Security Analysis Program in 1986. ASAP has produced several high-caliber investment managers, including Bill Nygren of Oakmark, Stephen Petersen of Fidelity, John Smet of Capital Research and Management Co. (advisor to the American Funds), and Foster Friess of Friess Associates (advisor to Brandywine Funds), among others.

Sekelsky participated in ASAP's student-run portfolio-management program. He and a team of comanagers ran a $125,000 real-money portfolio. Their investment goal was to beat the market over a nine-month stretch, the duration of the program. That short time horizon was a struggle for Sekelsky, who had started studying the long-term processes of Warren Buffett, Benjamin Graham, and other investing legends. Nevertheless, he and his classmates had a keen eye for some long-term winners, including Microsoft MSFT.

Taking Calculated Risks and Avoiding What's Hot
His move from Wellington to Madison Investment Advisors was a risk, but much like the style of investing he had read about in the books of Buffett and Graham, it wasn't an erratic bet. He had the chance to comanage Madison Mosaic Investors MINVX alongside firm founder Frank Burgess. Sekelsky had high regard for Burgess, who started the firm in 1973 amid one of the worst bear markets in history, a trial by fire that helped shape the firm. "Starting a money management firm in a year when the market drops 40% leads you to build an extra layer of precaution into the investment process," Sekelsky says.

This cautious foundation is evident in Sekelsky's process. At the Investors fund, which he took over as lead manager in 1995, Sekelsky buys stocks with an upside/downside ratio of 3 to 1 or higher--which means that, based upon his estimates of their intrinsic worth, Sekelsky thinks that his stocks have a much greater potential for price appreciation than for price decline. In addition, the manager only invests in companies that can consistently generate returns on invested capital above their cost of capital and those that can build shareholder value. Sekelsky also requires consistency and predictability of free cash flow, a trait that can be extremely valuable in turbulent times.PAGEBREAK

These strict criteria weed out many stocks in the large-cap stock universe, which until recently, included all companies in the energy sector. Sekelsky had shunned the sector because he didn't like that most energy companies' business models rely heavily on commodity prices, which tend to be volatile. He also didn't like their rich valuation levels and argued that they possessed too much downside risk. As the energy sector tumbled on lower crude-oil prices, however, some stocks have become attractive value plays, Sekelsky says. He scooped up the fund's sole energy pick, Schlumberger SLB, in September. He likes the fact that Schlumberger is run by great capital allocators and has a durable balance sheet.

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