"Of Mutual Interest"-Craig Callahan, Founder & President of Icon Funds
Tuesday, December 02, 2008PAUL KANGAS: The market's weakness in recent months has led even some of the best mutual funds to post big losses. So in tonight's "Of Mutual Interest" segment, we look at one multi-cap fund that is designed to lose less than similar index funds. It's the Icon income opportunity fund and the record shows it has performed as intended. Losses over the past year and since its inception were far less than those recorded by the Standard & Poor's 500 Index. Craig Callahan is the founder and president of Icon Funds. And Craig, welcome to NIGHTLY BUSINESS REPORT.
CRAIG CALLAHAN, FOUNDER & PRESIDENT, ICON FUNDS: Nice to be with you.
KANGAS: First we know that most mutual funds tend to mirror the market or at least their benchmark category. So how did you design a fund that is supposed to have less of a down side?
CALLAHAN: We buy stocks and we tilt toward our favorite industries because we try to capture market themes. But in this fund we write call options against those stocks, so that alters the risk return trade off of this portfolio.
KANGAS: When the market rallies though, you expect your income opportunity fund to go up less than the overall market, correct?
CALLAHAN: You're right. When you do write options against stocks, it does reduce your up side potential, but you write those options because it also gives you a down side cushion and sometimes you can even profit in side ways markets.
KANGAS: At Icon Funds your general philosophy is to outperform the market by picking undervalued stocks. But this year that approach hasn't worked so well. What went wrong here?
CALLAHAN: It's been a tough year for value investors. They've bought bargains and then later on they've become better bargains, but by writing the call options in this fund, it has greatly dampened our down side.
KANGAS: Do you expect stock valuations to get back to normal any time soon at all?
CALLAHAN: We're very bullish now. We'll look back on this as one of the all-time great buying opportunities in the history of the stock market.
KANGAS: Until recently one of your best performing funds was the Icon energy fund. While it had a rough year for a long time, it was the category leader. Do you expect it to rebound in the near future?
CALLAHAN: When we look at all the sectors on a valuation basis, we find the best bargains over in energy and that's because those stocks really got hit in September and October. So they represent to us the best bargains when the market rebounds. We would expect energy to be part of that.
KANGAS: Well, which Icon fund other than that do you think is best positioned to take advantage of a market recovery?
CALLAHAN: We think the recovery out of here will be led by cyclicals, so consumer discretionary would stand out as a participant in that type of theme.
KANGAS: How about the volatility, how do you deal with that at Icon?
CALLAHAN: In the income opportunity fund, by writing those call options when stocks go down, naturally you do have a loss on the stock side, but you can profit from the options that you've written. So that balances out, so to speak, dampens the volatility.
KANGAS: Do you think the volatility is here to stay for a long time?
CALLAHAN: Well, when you can go 6 percent one day and 3 percent the next, it appears that we have that and of course the income opportunity fund has held up very well in that setting.
KANGAS: OK now, so, but you still believe we're in a bear market here?
CALLAHAN: No. I believe a bottom has formed and it's just a matter of when the rally begins.
KANGAS: Really.
CALLAHAN: We're very bullish.
KANGAS: That's very interesting to hear. Craig, I want to thank you very much for your insights.
CALLAHAN: Nice to be with you.
KANGAS: My guest, Craig Callahan of Icon Funds.
