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Allocation, Selection, and Caution
James Balanced: Golden Rainbow Fund
Interview with: Barry R. James

Author: Ticker Magazine
Last Update: Mar 15, 10:48 AM ET
Long-term investors are unlikely to forget how much one makes is important, but what one keeps matters more. Barry R. James, portfolio manager of the James Balanced: Golden Rainbow Fund, utilizes proprietary research while allocating capital between stocks and bonds in search of securities with the potential to generate returns with the least amount of risk.


“We started with a basic theory that stocks do not move randomly; there are paths of inefficiency, and losing money is a very bad thing. Our approach is to take the least amount of risk that does not prevent us from making money.”
Q: What is the history of the company and the fund?

A: My father, Dr. Frank James, is the founder and chairman of James Investment Research, Inc. He started the firm in 1972, and today we manage more than $6 billion in assets for clients.

My father was an Air Force officer who earned his doctorate from Rensselaer Polytechnic Institute with a dissertation on the stock market. He looked at every stock from 1926 to 1960 and developed the thesis that the random walk theory was wrong; instead he found stocks that are outperforming the market usually continue to outperform the market. In 1972 he established James Investment Research. In its first two years the market fell 50%, and yet our clients still made money.

We started with a basic theory that stocks do not move randomly; there are paths of inefficiency: and losing money is a very bad thing. Our approach is to take the least amount of risk that does not prevent us from making money.

Our first mutual fund, the James Balanced: Golden Rainbow Fund, launched in 1991 with a dual mandate: growth and income, and preservation of capital in falling markets. The Fund has a good track record of minimizing losses.

Q: What were the fund’s worst and best returns since inception?

A: Our best return was in 1995, when we were up 22.67%. But in the long run it is not what you make, it is what you keep. Our worst return was obviously in 2008 when we were down only 5.5% when popular indexes fell close to 40%.

Q: How is your fund different from its peers?

A: One aspect is we actively manage the allocation among stocks, bonds, and cash, based on our risk assessment. The equity component is all capitalization, so we have small, mid, large and even micro-cap stocks in the Fund, and we shift the proportions in each of them to where we see opportunity. Up to the beginning of 2016 we were running 15% or so in small and the rest in large and mid; currently we are up to about 30% in small with the remainder in large and mid.

Our approach is not to be a clone of any index, in any way, shape, manner or form. We buy stocks based on whether they are bargains or not, based on our proprietary research. We are well diversified by sectors, more equally weighted. We actively manage the fixed income, which includes only investment grade bonds, and we shift among the sectors. In 2008, especially in the fourth quarter, what saved us was we only had U.S. Treasuries in the Fund. They were the only thing that made any money at all.

Now we have corporates, agencies, mortgage-backed securities, and even some municipal and sovereign bonds. We actively manage each of those areas, with the goal of trying to preserve capital, we have been running plus or minus 50% in stocks, but the range can go up to 80% or down to 20% in stocks. We are not rapid jumpers, though; we don’t go from one extreme to the other.

Another aspect that makes us different is we do not buy research. We only buy raw data, and we process it ourselves in-house. We do a lot of testing based on my father’s original research—but when we make a decision we can move quickly.

Q: What are the core principles behind your investment philosophy?

A: The first tenet is risk reduction, and we do that at every level. In our stock selection, in bond portfolio management and in asset allocation, everything we do is designed to take the least amount of risk that won’t prevent us from making money.

The other principle is that you cannot just follow the crowd and expect to be successful. So we are contrarians a lot of the time, in both asset allocation and individual stocks. As an example, the higher the expectations of future earnings on a stock, the less we like it, because those earnings are already built into the price. But we are not contrary just for the sake of being contrary. If our research says now is a good time and everyone else says it is a bad time, that is an opportunity for us.

So our process is allocation, selection, and being contrarian supported by our research. By testing things ourselves we turn future probability in our favor and in favor of the investors in our Fund.

Q: What is your investment process? Where do you start and what steps do you follow?

A: Our investment process has three phases. The first is the allocation phase. We do a yearly analysis that looks ahead at the market, the risks from a macro standpoint, the influences and major trends. In 2008, for instance, we saw an unwinding of the housing bubble, and so we did not own any mortgage-related firms, we only had pawn shops and insurance companies that could take advantage of a troubled market.

Then on a weekly basis we do a risk analysis of the stock and the bond markets. We have developed about 100 indicators that point to risks in the long term, beyond six months; the immediate term, the next two to six months; and the short term, the next two to three weeks. When the long-term indicators are favorable, we are more bullish, possibly above 50% in stock. The intermediate indicators point to the next likely shift in the markets. And when the one-, two-, and three-week indicators point to higher risk, this means the market should have a little pullback, which could be a good time to buy. We update those indicators every week; our team reviews them and we make a determination about whether to change the equity levels in our balanced portfolio or not.

The second phase is the individual stock selection. There is somewhat of an overlay from a macro standpoint where we may be soft or heavy in some areas. For example, take our view on oil. There are certain levels at which the drillers do well and certain levels where the refiners do well. We have figured that out to some extent and it is helpful as a macro overlay.

In equities, our key driver is to be diversified across the sectors and to have representation in every sector. Again, we do not try to mimic an index. We have our own internal weightings based on macro factors for the sectors, but it is closer to being an equal-weighted approach than anything else.

Within each individual sector we have a weighting in terms of large, mid and small cap stocks we look for within the portfolio. We look at about 8,500 stocks, searching for companies that are relatively cheap and not completely discovered. We also look at what is happening internally in those companies, whether management has ownership in the company and whether they are buying more. But generally we focus on valuation, so we look for lower price-to-earnings, or price-to-book, or price-to-cash than the market as a whole. We also try to find stocks that are somewhat ignored—that’s a large component of what we look at.

We also look at earnings; we only want to own companies that have earnings. In 1999 and early 2000 the Fund lost a lot of business because we would not buy companies that did not have earnings. So even though we made money in 1999 we weren’t buying all those Internet companies that didn’t have any earnings. And the irony was that in 1999 companies with earnings went down 10%, whereas companies without earnings went up over 20%.

We have not found a good way to use projected earnings, so we look at historical earnings instead. We do a long-term comparison, say the past 12 months versus the 12 months before that, focusing on earnings momentum we also look at return on assets, and cash flow. We like to see cash flow from operations on an upward trend; when the market goes haywire those stocks tend to not go down as much. This is effective when there is something cheap and has good earnings.

The question is always, when do you own something and when do you sell it? If it has our two components—if it is cheap and has good earnings—we want to own it. And the other side of it is that when the market goes haywire, which it eventually does, those stocks do not go down as much.

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Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc