Zeke Ashton (Trades, Portfolio) may run a concentrated portfolio, just a couple of dozen stocks at most, but he finds it difficult to stay fully invested in this market.
He wants to find above-average total returns and get them, likes to collect dividends and sometimes write covered calls. Above all, he searches for quality stocks in fields he understands well.
Ashton’s vehicle is the Centaur Total Return Fund, which began life in 2005 as the Tilson Dividend Fund. Over the past 10 years, he has averaged 7.7% per year, 0.8% per year better than the Standard & Poor's 500.
Who is Zeke Ashton?
The guru graduated Austin College in Sherman, Texas, in 1995, having earned degrees in economics and German. For the following five years he did treasury and risk management consulting, then became an investment analyst and featured writer for The Motley Fool.
In 2002, Ashton founded Centaur Capital Partners, which was to specialize in value-oriented investment strategies. He began managing the Tilson Dividend Fund when it was launched in 2005 (the fund has since been renamed the Centaur Total Return Fund).
What is Centaur Capital Partners?
Centaur Capital Partners LP is a small investment advisory firm based in Southlake, Texas. In its Form ADV dated May 15, the firm reports $92 million in assets under management.
The firm’s biggest account is the Centaur Total Return Fund, which serves pooled investment vehicles and investment companies.
According to its Prospectus, the objective is to "seek maximum total return through a combination of capital appreciation and current income." The reference to current income underlines the importance of dividends to the fund.
It notes that while the fund invests mainly in common stocks, it may also invest in other securities, including bonds and warrants.
Ashton also advises it tries to generate additional income by selling covered call options on stocks held in the fund. He says this allows the fund to include undervalued, nondividend stocks in the portfolio while still being able to generate investment income.
Ashton’s firm operates one mutual fund that is sold mainly to institutional investors. The principle objective is to maximize total returns.
Ashton’s investment strategy
As outlined in the Prospectus, the investment strategy begins with companies the adviser (Ashton) understands well. In addition, candidate companies must exhibit one or more of these characteristics:
- Revenue or profits trends must be positive or expected to be positive.
- Strong balance sheet: Debt must be well covered by cash, working capital must be efficiently allocated, liquidity must be high or increasing, able to withstand unexpected shocks, and reinvesting in the business.
- Robust cash flow.
- Moat: competitive advantages that are sustainable.
- A management team that wisely allocates capital to increase shareholder value, demonstrates high integrity and/or adopts policies that do not unduly dilute shareholders’ ownership.
In addition, the fund may consider stocks with high dividend yields. Normally, it looks for a stock that is trading at a substantial discount to its intrinsic value. It might also look at a stock selling at a modest discount to intrinsic value if the dividend yield is high enough, secure and likely to grow. More specifically, at the Centaur Web site, Ashton refers to "high dividend yields relative to the yield of the broad market averages."
Covered call income is generated by way of an options contract that may obligate the seller (Centaur, in this case) to sell an options buyer a certain quantity of stock at a predetermined price on the contract’s expiry date. The seller of the contract receives a premium for making the stock available; the buyer gets the right to buy the stock at a specified price, even if the market price is much higher.
For example, at the close of trading on June 13, the SPDR S&P 500 ETFÂ (SPY, Financial)Â traded at $244.55. Selling a call option at the $250 strike, expiring on Sept. 15 (about three months away), would generate a premium of $1.79 per unit/share (figures from Yahoo Finance). Assuming one could do this four times a year, the premiums would amount to a 2.9% gain. This would be in addition to dividends, which Dividend.com reports as 1.69%. Of course, there is no guarantee that options will deliver as planned; they are notoriously fickle.
Further insight into Ashton’s thinking is available through his Annual Letter to Investors, most recently published on Jan. 7:
- Regarding his fund’s "pedestrian" performance in fiscal 2016 (ending on Oct. 31), he observed that recent years have been difficult for value investors because of the historically high valuations of American stocks. Ashton said they have come to depend on "occasional episodes of market volatility" to find new, bargain-priced securities.
- Ashton said the market offered two brief windows to value investors in 2016; a double-digit decline of the S&P 500 in January and the Brexit selloff in June. In addition, the market volatility that followed the Brexit vote allowed it to profitably sell covered calls (option premiums generally go up as volatility increases, and vice versa; thus, the higher volatility allowed it to collect larger premiums).
- And he noted there is more to generating returns than simply good stock picking. 2016 might have been better, he argued, had the fund been more fully invested. “The challenge for us has been maintaining a fully invested portfolio, at least one that is consistent with our traditional discipline regarding valuations, position sizes and the limitations of various risk factors across the portfolio.”
- In adapting to this new environment of high valuations, Ashton said he believes they’re getting better at moving quickly and decisively when the market offers its “limited-time-only sales.” He also believes that market volatility is likely to come back at least somewhat after being dampened for several years by central banks and low interest rates.
- On Oct. 31, 2016, the end of fiscal 2016, the Total Return Fund had about half its assets in cash and money market funds, and about half in equities, warrants, ETFs, mutual funds and other securities.
Ashton also outlined his thoughts on several of the companies in his portfolio, a concentrated portfolio of 24 holdings:
- The largest positions at fiscal year-end were Berkshire Hathaway (BRK.B, Financial) and Alleghany Corp. (Y, Financial). He said both are “total return insurance holding companies” providing strong insurance operations along with flexible and conservative capital allocation.
- One of the companies Ashton began buying after the Brexit vote was Cognizant Technology Solutions (CTSH, Financial), which offers outsourced business processing and technology solutions. From 2005 to 2015, it grew its revenue 14-fold and its cash flow profitability about 26-fold. As the chart below shows, the stock price plunged in September when the company disclosed an internal investigation into potentially improper payments made by company personnel in India. Ashton believed this issue would be resolved without undue losses and bought more Cognizant stock; as the chart shows, that was a shrewd call.
- The other stock that got attention in the Letter was IAC/Interactive Group (IAC, Financial) which operates several media companies, including HomeAdvisor, which connects homeowners with service professionals for home improvement projects, video platform Vimeo and majority ownership in Match Group (MTCH, Financial). He said Centaur has been impressed with IAC’s "strong" history of value creation and capital allocation. Adding to that, he sees HomeAdvisor and Match as having reached industry leadership positions that should drive profitability growth.
Ashton’s thoughts on managing in high-valuation markets are worth examination and consideration. All investors, whether value focused or not, must watch for brief windows of opportunity, and when the opportunity arrives, have done enough fundamental research to then act quickly and decisively.
Centaur total return: current holdings
This is a concentrated fund, two dozen or fewer stocks, but one that manages to spread itself around several sectors, as shown in this GuruFocus chart:
These are the top 10 stocks, as of March 31, along with the proportion each represents in the portfolio:
- Berkshire Hathaway 11.5%.
- S&P 500 ETF 10.51%.
- IAC/Interactive Group 7.28%.
- Franklin Covey Co. (FC, Financial) 6.22%.
- XO Group Inc. (XOXO, Financial) 5.98%.
- Brown & Brown Inc. (BRO, Financial) 5.32%.
- Activision Blizzard Inc. (ATVI, Financial) 5.03%.
- USA Technologies Inc. (USAT, Financial) 3.84%.
- Alphabet Inc. (GOOG) 3.74%.
- Alleghany 3.65%.
Unlike most hedge and mutual fund managers, Ashton does not shy away from holding a piece of the benchmark; in this case about one-tenth of the portfolio is made up of the SPDR S&P 500 ETF. Berkshire Hathaway, a holding company that owns stakes in a wide variety of S&P 500 and equivalent stocks, also has a prominent place. All of which suggests that building a base on the benchmark or near-benchmark is a workable strategy.
Ashton’s performance
The following GuruFocus chart shows his performance over the past 11 years (note that the fund has been renamed Centaur Total Return Fund):
Unlike many other gurus, Ashton did not have an opportunity to build a performance record before the 2008 financial crisis dragged down almost every manager’s returns. But, he bettered the S&P 500 over the 10-year cumulative with strong, double-digit returns in four of the five years that followed.
Conclusion
With his emphasis on dividends and his interest in covered calls, Ashton has made the gurus list by bringing in above-average total returns. He focuses not simply on capital gains but has a vision that allows him to act opportunistically when the time is right.
He is essentially a value investor, but his unique take brings in the power of dividends and other elements. Notably, he is biased to quality companies that he can understand well – shades of Warren Buffett (Trades, Portfolio) –Â that have quality balance sheets and shareholder-oriented management.
Ashton’s thoughts on carrying cash and finding opportunities should be of interest to other investors who face the task of putting their capital to work in a market that has been called overvalued for several years.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.
