A fund manager with 50 years' experience is beating the S&P 500 this year. How he did it and the stocks he's watching

Published Sun, Nov 6 20227:56 AM ESTUpdated Tue, Nov 8 20222:35 PM EST

John Kornitzer has been in the investing world for five decades and from his perch outside Kansas City has seen everything from Black Monday to the dot-com bubble. But bear markets don't scare him. In fact, he sees them as a good time to make moves – for investors who can play their cards right. "I've been around this investment game 50 years, and every time there's a bear, there's a bull" that comes after, he said. "You just gotta know when to buy in the bear. And that's just, I think, experience." He's spent the last three decades as the founder and CEO of Kornitzer Capital Management and the Buffalo Funds, its mutual fund group. That bear market perspective is setting the Wall Street veteran apart in a bleeding red year for the stock market. Kornitzer's Buffalo Flexible Income Fund is down about 8.5% this year, handily outperforming 22.5% slide in the Russell 3000 , its benchmark, as well as the S & P 500 , which has lost 20.6%. 'Slaughtered down' What is now the flexible income fund started in 1994 as a balanced fund because Kornitzer had a lot of clients with small IRAs. Kornitzer wanted clients to benefit from greater diversification, despite annual limits of $2000 on their IRA contributions. At the time, bonds offered high coupons, though most of those have since rolled off the portfolio. Kornitzer said the fund could buy in again, depending on how they move in the bear market. That fund, which has an expense ratio of 1.01% for its investor share class, has continued for almost three decades. Kornitzer has kept the strategy mostly the same: Look for cheap companies that pay dividends and have a strong growth outlook. Kornitzer, who once ran money for Employers Reinsurance Corp. and General Electric Investment Corp. before going out on his own in 1989, has mostly steered the fund away from cyclical businesses but sometimes gets back in when he senses 12-month upside. And he always has a focus on staples that people buy regardless of the economy, such as food, insurance and drugs. "We look for the best companies," he said. "In bear markets like this, we're looking for the best companies that [got] slaughtered down to 10-, 12-, 13 times P-E ratios with good yields and we'll put them away." Take Microsoft , which he bought a few cycles ago for under $40 per share. The Windows software maker closed Friday at $221.39. Similarly, Costco was also bought under $40 a share, where it languished for much of the late 1990s and early 2000s. It last closed at $486.41. Another example Kornitzer pointed to was insurer Arthur J. Gallagher , which he bought at around $35. It last closed at $188.39. The Buffalo flexible income fund currently holds 57 stocks, with Microsoft as its largest position, accounting for 7.5% of the portfolio. By sector, its biggest weighting is in energy, this year's only industry that's higher in the S & P 500, which takes up 27.9% of the fund's holdings. Apart from Microsoft, for the most part Kornitzer avoids having one stock take up too much of the total portfolio, and will sometimes pull back on outperformers when he sees the right moment to switch into a low-cost stock instead. An 'odd creature' To be sure, that focus on dividends and less obvious growth stories typically means slower appreciation than some investors came to expect during the long bull market of the 2010s. A hypothetical $10,000 invested at the fund's inception would have grown to about $69,000 at the end of September, according to data from the firm, or a little more than half of the growth seen across the Russell 3000, which would have appreciated to about $132,000. But David Snowball, publisher of Mutual Fund Observer, said it's difficult to compare the fund to a benchmark index because of its slow movement from bonds to equities. Calling it an "odd creature," he said the Buffalo fund has moved from being thought of as a "60/40" fund split between stocks and bonds, to pure equity. That accompanied growing skepticism toward the bond market in the past decade, he said. Still, Snowball does not doubt the strategy behind the fund. By his analysis, he's found the fund to underperform about half the time in the past decade compared to a variety of benchmarks. But he focuses more closely on rolling returns from approximately 300 periods since it moved away from being more balanced, which shows it returns about 7% annually over three-year periods and 6.7% annually over five-year periods. "If you're thinking to yourself, 'I'm not going to get greedy, and I'm not going to get panicked. I know if I hold on for five years, I'll probably make 6% or 7% a year for that period," he said, then the Buffalo fund is "going to be just fine." The 'hit list' Kornitzer is screening about 30 stocks as potential buys in the current bear market, ready to pull the trigger if any fall far enough. Though he hasn't bought any yet, there are three stocks at the top of Kornitzer's "hit list" he's closely monitoring for further declines: Tractor Supply : Last closed at $206.56, down 12.4% in 2022 Home Depot : Last closed at $284.03, down 30.5% from where it began the year. International Flavors & Fragrances : Closed at $94.83, lower by 36.4% year to date Ultimately, Kornitzer pins his strategy on sitting tight and waiting for the price to come to him. A bear market doesn't have to be devastating, he said, if you can find hidden value stocks amid the carnage. After more than 50 years of market ebbs and flows, dating back to the Nifty 50 and the Go-Go market of the 1960s, Kornitzer exudes calm. "Don't panic in this market," he said. "If you have crap, sell the crap and buy good stuff. It will come back quicker." Correction: This article has been corrected to reflect information provided by the fund's parent to show a $10,000 investment at inception would have grown to about $69,000 at the end of September.