Prospector Opportunity Fund (POPFX) is a top ranked fund by Morningstar (five stars). Although it is a decent fund in good markets, it is the down markets in which it excels by protecting investors from the steep losses that its peers often experience. Three companies the fund’s managers like for their combination of upside potential and downside protection are Platinum Underwriters Holdings, Ltd. (NYSE:PTP), Franklin Resources, Inc. (NYSE:BEN), and Church & Dwight Co., Inc. (NYSE:CHD).
OK Upside, Great Downside
Although nobody likes to lose money, co-managers Kevin O’Brien, Richard Howard, and John Gillespie certainly did their shareholders a favor by avoiding the worst of the market’s huge downturn in 2008. The fund was “only” down 19%, while the market was off more than double that at nearly 40%. Avoiding big pain in that year has helped the fund earn a nearly 8% annualized return since its September 2007 launch, outpacing its Russell 2000 Total Return Index benchmark by over three percentage points through March of this year.
Looking for Value
The fund has a value orientation and builds its portfolio from the bottom up. Key factors in the purchase process include a review of a company’s balance sheet strength, management quality, products and/or services, overall franchise or brand value, and an assessment of the company’s business model. The co-managers also look specifically for a catalyst that will lead to improved performance, such as a change in management, corporate actions (a unit sale), or changing industry fundamentals.
However, Kevin O’Brien highlighted in my interview with him a single question that the co-managers ask that helps explain the fund’s solid long-term performance: “If this doesn’t work, how much will we lose.” The trio wants to ensure that they don’t get so caught up in the upside that they lose sight of the risks of an investment.
Here are three stocks the co-managers like today based on their upside potential and their downside protection:
Insurance for Insurance
Platinum Underwriters Holdings, Ltd. (NYSE:PTP) is a reinsurer operating in the property, marine, casualty, and finite risk markets. It has a global footprint and a generally conservative management team. For example, O’Brien notes that the insurer would rather not write business than sell unprofitable policies.
While that can mean walking away from business, it also means more stable long-term performance. In fact, management would rather buy back shares than get into a price war. Although industry pricing is good today, over the last six years or so, the company has bought back around half its outstanding shares.