By David K. Randall
NEW YORK (Reuters) - The best performance of any U.S. mutual fund in the first quarter was turned in by a father-and-son team swapping phone calls between South Florida and Northeast Pennsylvania.
Joseph R. Biondo - who goes by Joe - and his son, Joseph P. Biondo, manage the Biondo Focus Fund, which has $23 million in assets. Their fund returned 39.7 percent over the first three months of this year, a full 8.6 percentage points more than its closest competitor, the $8.4 billion Fairholme fund managed by famed investor Bruce Berkowitz, according to Morningstar data.
The broad Standard & Poor's 500 Index, the benchmark for most mutual funds, returned 12 percent over the same time.
The Biondos attribute their strong performance to a willingness to take concentrated positions and wait for the market to turn in their favor. The fund holds just 19 stocks while the average stock fund holds 182 companies, according to Morningstar.
"We believe in letting our winners run," Joe Biondo said. "Out of all the 19, not all will work out and we'll have to cut bait. But at the end of the year, 15 or 16 of the names will still be there."
Its performance capped a quarter in which other focus funds - those non-diversified portfolios that typically take large stakes and hold fewer than two dozen companies - outperformed nearly all of their peers.
Fairholme returned 31.1 percent on the strength of its portfolio of 15 companies, while the $42 million Berkshire Focus fund, concentrated on technology, returned 28.4 percent with its portfolio of 29 companies. All told, four of the 10 top-performing stock funds took highly concentrated stakes in companies.
When managers pick winners, these large positions can lead to big gains. But the high concentration can leave investors' dollars exposed to one ill-timed bet or unforeseen hiccup with little to cushion the damage. "Any manager who is this willing to make concentrated, contrarian bets will look foolish from time to time," noted Kevin McDevitt, a fund analyst at Morningstar.
The performance of the Biondo Focus Fund in the two years since its creation illustrates that its strategy can be hit or miss. The fund has returned an average of 2.8 percent over the eight quarters of its existence. The S&P 500, meanwhile, returned 3.4 percent over the same time.
Those averages smooth out quarters when the fund diverged widely from the S&P 500. In the first quarter of 2011, the Biondo fund returned 14.6 percent, compared with a 5.9 percent gain in the S&P index. In the fourth quarter of the same year, the Biondo fund fell 10 percent while the S&P 500 gained 12 percent.
The Biondos say that investors who put money into their fund know the risks of their approach.
"We try to do a good job of educating any investors that what we're trying to accomplish is very high returns, and one of the drawbacks is periods of underperformance as well. Most advisers we work with understand that and will only allocate a certain amount of their client's assets," said Joseph P. Biondo, the son.
Joe Biondo began working on Wall Street in 1962 with Loeb Rhoades, a predecessor firm of Smith Barney. Joseph, his son, started his career with Prudential Securities in 1997 after graduating from the Wharton School at the University of Pennsylvania.
The pair began co managing separately managed accounts 12 years ago, and launched their fund to follow the same strategy they've been following for the past six and a half years for their private clients. Joe now works out of an office in Naples, Florida, while his son remains in Milford, Pennsylvania, a tiny town just across the Delaware River from New Jersey.
When evaluating stocks, they first look for growth companies with "disruptive technologies," said Joe. One example: Intuitive Surgical, which manufactures instruments used in robotic surgery. "We think that this is really interesting technology that could change the face of open heart procedures," said Joseph.
The fund began buying shares in the company in 2003 when they were priced at $16. Intuitive Surgical now trades at $575 and is up 57 percent over the past 12 months.
Another health care company, Mako Surgical Corp, makes up the fund's fourth-largest position with 10.7 percent of assets. The company, which markets devices that provide computerized assistance for knee and hip surgeries, is up 48 percent since the start of the year.
Joe Biondo expects the fund to hold the company for years, even if the share price slips in the meantime. "It could be a couple of years before they really start making money. But once the machine placements ramp up, then you'll be in the business of selling razor blades to the disposable market," he said.
Not all of the fund's holdings are so specialized. The Biondos have 5.5 percent of assets in Ford Motor Co because they like its growth rate overseas, and 7.8 percent of assets in MasterCard because they think the use of credit cards will continue to grow in Asia and Africa. Apple, another technology company expanding into new markets, is the fund's third largest position with nearly 11 percent of assets.
Perhaps surprising for a fund focused on new technology and markets, the Biondo's largest holding, 20.4 percent of assets, is a stake in JP Morgan Chase through warrants that expire in 2018.
"This is a really long term play on what we believe is the healthiest bank in America. We feel very confident in having six-and-change more years with Jamie Dimon at the helm," said Joseph. The company will continue to do well once the economy begins to return to normal and the housing market clears up, he said.
As one might expect with such a small portfolio, the Biondos feel an emotional connection to each of their 19 companies. Their recent strong performance doesn't worry them that their style, or companies, have peaked.
"We're happy owning something for 20 years," Joe Biondo said.
(Editing by Walden Siew, Phil Berlowitz)