Street Wise: Financial services fund loves mortgage servicers

For Anton Schutz, manager of the $233 million Burnham Financial Services Fund (BURKX), it’s all about dark clouds and silver linings.

After defying the market’s gravity during the past three years with gains of 52.8% in 2000, 29.3% in 2001 and 17.6% last year, Mr. Schutz is now bracing for the next economic cycle.

As interest rates start to edge higher, for example, he has been placing less emphasis on companies that refinance mortgages and more on companies that actually service those loans.

“The greatest risk right now is owning mortgage originators if they don’t have mortgage servicing rights,” he says.

Along those lines, Mr. Schutz calls Countrywide Financial Corp. (CFC) of Calabasas, Calif., “one of my favorites.”

As one of the largest originators and mortgage servicing companies in the country, Countrywide is essentially a soup-to-nuts player in the mortgage industry that won’t be affected as badly as some less-diversified companies by a slowdown in refinancings.

Countrywide, which closed Thursday at $70.65 a share, had gained 32.7% so far this year. This compares to a 16.8% gain by the Standard & Poor’s 500 stock index. The Burnham Financial Services Fund was up 24.9% over the same period.

Even at that price, Countrywide’s stock is trading at just eight times earnings, and Mr. Schutz says his 12-month price target of $95 to $100 a share depends on Wall Street’s ability to understand Countrywide’s business model.

“Countrywide needs to prove to the Street that it can earn money in a rising-interest-rate environment,” he says.

Mr. Schutz, president of Mendon Capital Advisors Corp. in Rochester, N.Y., has been managing the financial services sector fund under a subadvisory agreement with New York-based Burnham Asset Management since the fund’s inception in June 1999.

Another of his countercyclical targets is the private mortgage insurance business, which is expected to benefit from a slowdown in mortgage refinancings.

The PMI Group Inc. (PMI) of Walnut Creek, Calif., is likely to see earnings climb over the next few quarters as the current pipeline of refinancings moves through the system and its premiums stabilize.

PMI’s stock closed Thursday at $35.71 a share, up 15% since the start of the year.

“When interest rates go up, The PMI is less likely to be refinanced away,” Mr. Schutz explains. “This is a good-credit-quality company with solid earnings that I think can trade in the mid-40s.”

The fund, which includes 75 stocks and tilts toward value, has the flexibility to span all corners of the financial services sector, which is apparent by the portfolio’s current mix.

The fund’s largest subsector allocation, at 37%, is to savings-and-loan companies. Regional banks make up 25% of the fund, and money center banks represent 10%.

Mr. Schutz, who also manages a $22 million hedge fund, says his ability to concentrate on the financial services sector enables him to be a “category killer,” giving him an edge over those fund managers who focus on the broader equity markets.

The fund’s success – underscored by a 66% increase in assets under management over the past four months – is driving Mr. Schutz to expand his horizons.

The fund, which Mr. Schutz says is currently taking in more than $500,000 a day, is expected to close to new investors when it hits the $300 million mark.

“If you get too big, you lose the ability to be nimble and then you lose your advantage,” he says.

However, Mr. Schutz is already considering his options for possible spinoffs.

“We have the capacity to open an additional fund,” he says, suggesting that a pure large-cap version or even a long/short strategy might fit the bill.

Questions, observations, stock tips? E-mail Jeff Benjamin at [email protected]