How one farmer fund manager ekes out gains

Jeffrey Auxier has a good personal reason to strive for a solid performance for the small mutual fund he manages in Portland, Ore.: He launched it in 1999 by investing much of his own money in it.

So far he's not sorry he did that.

Years ago, fresh out of college, Mr. Auxier called famed investor Warren Buffett for advice on investing. He was told: "No. 1, don't lose your principal, and No. 2, never violate the first rule."

By following that advice, Auxier has managed to keep the shareholders of his Auxier Focus Fund relatively unharmed. With $22 million invested today, they largely escaped the three-year bear market that followed the 1990s stock-market bubble. As a result, his fund has won five stars - the top score - from Morningstar, a Chicago firm that rates and analyzes mutual funds and other investments.

"The fund is off to a great start, but we'd like to see more of a track record," cautions a Morningstar analyst.

Auxier also has managed for a longer period some $200 million in high-net-worth accounts.

This year, the fund shares are down approximately 3.8 percent, about a percentage point more than the Standard & Poor's 500 stock-market index. "It's a little frustrating for me," he says.

Over the past three years, the fund has had an average return of 0.3 percent a year.

That may not seem like much. A bank certificate of deposit would have done better.

But compared with a decline of 16.2 percent a year for the S&P 500 and the performance of most mutual funds in the same period, managing to emerge whole is as glorious as seeing the arrival of spring.

Auxier explains that good performance by citing his investment motto: "price, value, and margin of safety."

That means he spends about seven hours a day scanning annual reports and other corporate financial documents, working with a researcher.

"There's no substitute for grinding it out yourself," he says. "You need to understand the underlying business." He disapproves of "formula-type" investment practices.

These days he's looking for companies with sound cash flows, firms not likely to be hit hard by inadequate funding of their employee pension plan or a high debt level. These companies, Auxier says, "can control their destinies."

If the stock of such a firm does not rise, at least the downside risk is not substantial. Other stock choices will be winners, and compensate.

He also takes seriously the advice of a mentor and friend of 32 years, Robert Pamplin Sr., a former longtime CEO of Georgia Pacific. As an 11-year-old, Auxier mowed Mr. Pamplin's lawn. Pamplin taught him that business should be ethical and transparent. Pamplin never drew an excessive salary or abused stock options, Auxier notes. They still meet for lunch every week.

Auxier figures he has an advantage over many younger mutual-fund managers. As a portfolio manager and research analyst for Smith Barney (now part of Citigroup), he got "beat up a few times" by financial events - the thrift crisis of the early 1980s, the energy bubbles of the 1970s, and the 1987 stock-market crash. So now he's more wary of market overenthusiasm.

Another advantage is that the investment rules of his fund allow him to diversify his portfolio beyond stocks when their risk becomes too great.

"We have a wide latitude to go where the value is," he says.

That was useful when the market was into, as Auxier puts it, "the mother of all bubbles," three years ago. He put some money into corporate bonds. These have risen in value.

Right now he has nearly 30 percent of the portfolio in bonds of such companies as Waste Management and AOL Time Warner. His fund also owns stock in medical firms and Travelers Property Casualty, an insurance firm.

Auxier's location on the West Coast, beyond Wall Street or Boston, is no longer so unusual for a mutual-fund manager. Modern communications and a freedom from contagious financial excitement can arguably offset any advantage from being a close insider.

Nonetheless, Auxier is unusual in that he lives with his wife and four children 12 minutes from his office on a 58-acre farm, primarily growing hazelnut bushes and Douglas fir trees.

"I like the values of farming - getting up early, working hard," he says. And though he has help running the farm, he maintains he can accomplish some "mental work" for his business, even if sitting on a 43,000-pound bulldozer, clearing land. Auxier also notes that timber has provided its owners an average return of 7 percent a year since 1910.

But he hasn't harvested his trees.

Auxier says he's reluctant to predict overall stock-market prices. But he does mention financial problems that will weaken earnings - corporations must cover their pension burdens, account properly for stock options, and make provision for off-balance-sheet operations, such as those that hit Enron.

If such factors are accounted for, prices could still be high. During the bubble, technology-stock prices were running about 240 times earnings, he notes. They have come way down. But in 1982, many were priced at six times earnings.

Then there is the national problem of a federal budget that has shifted from a huge surplus to a major deficit in two years.

But Auxier takes encouragement in the way Mr. Buffett turned an investment of several thousand dollars in 1956 into $35 billion. The theory that the stock market prices corporate shares "efficiently," so that choosing stocks randomly or via an index fund works as well as by careful selection, is "folly," he says.

Otherwise, how could Buffett have done so magnificently?

And, he might have added, why would investors put the minimum of $2,000, or more, in Auxier Focus Fund, counting on Auxier to beat the market?