When Jerry Jordan was deciding what to call his new mutual fund, he wanted a name that would reflect a decisive investment style that takes its cue from what he describes as "strong, investable themes with growth potential." Three years later, the manager of the Jordan Opportunity Fund sees health care and energy as the themes with strong potential for growth and reasonable valuations, and with over half of the fund's assets in those sectors, he is clearly willing to stake a sizable claim based on his convictions.
"A lot of people believe energy has already had a strong run and is too economically sensitive, but I look at it as a growth area," says the 41-year-old Jordan. "Eighty percent of demand comes from transportation, so even if oil prices go up people are still going to drive. And China and India are adding millions of new drivers to every year." He adds that with anemic supply growth, it is unlikely that oil prices will drop and will more likely continue to rise.
He views health care, which accounts for nearly one-third of fund assets, as a recession-resistant sector that has underperformed for most of the last seven years. While the stocks are inexpensive, Jordan says he expects the health care companies in the portfolio to grow earnings at a healthy 12% to 20% annual clip.
Beyond health care and energy, the fund is spread widely with small stakes in about a half-dozen other industries. The fund is treading lightly in banks, retail stocks and technology. The latter sector "is too expensive, and has too many believers who are dying for tech stocks to do well in 2008." But he has been buying some of the more "growthy" software names where the underlying demand remains firm, either because of their product line or the cycle they are in.
To find dominant sectors Jordan starts with a top-down look at the markets, the industry environment and inflation. He then looks for four to six major secular themes that may be underappreciated or ignored by the market, and takes sizable positions in them. Sources for ideas include quarterly earnings reports, trade magazines, general interest publications and newspapers.
"Most fund companies have dozens of analysts all studying industry groups that no one has any interest in most of the time. We focus only on areas that make sense to use right now, and then have the entire organization focus on the same areas so nothing slips through," he says.
What the $35 million fund lacks in size it makes up for in decisiveness. To give stocks an ample voice in the portfolio the fund typically owns between 25 and 40 securities. The largest position, a precious metals exchange-traded fund, represented 7% of assets in late February.
To get the nod, stocks must have growing earnings, a proprietary process or technology, and a dominant share of their market. They must also look attractive from a valuation standpoint. "Historically what you want to own are companies that have already priced in bad news, or where they're not going to have any bad news," says Jordan.
Once the themes and the companies representing them lose steam he'll find more productive ideas to replace them. With a portfolio turnover rate of 384% in 2005 and 304% in 2006, the last full year of reporting, it is clear that he likes to manage aggressively around market cycles. Sometimes he will sell large positions in a particular sector he thinks is ripe for a downturn and buy back the same stocks a few months later after the carnage. He may establish positions after significant market corrections have brought stocks down to valuation ranges he considers attractive, then sell once they reach his price target.
The buzz of activity, he admits, makes the fund more appropriate for tax-deferred retirement accounts where tax efficiency is not a concern. "Sure, you can call me a market timer," he says. "But most people who have invested in the fund aren't complaining." Based on its one-, three-, and five-year annualized returns the fund has been among the top 2% of Morningstar's large growth category, with only one negative quarter since its inception in January 2005.