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Top Fund Holds Small Caps—and 'Holy Trinity' Large Caps, Too

Like the name of his mutual fund suggests, Thesis Flexible Fund manager Stephen Roseman keeps his options open. He favors large-cap tech, hates mall REITs and finds alluring small-cap firms such as Global Ship Lease and West Marine .

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The mutual fund has returned 3.4% over the past year, putting it in Morningstar's 69th percentile for long-short funds, which can bet on declines in share prices.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

TheStreet: How do you manage your mutual fund so it acts like a hedge fund?

Roseman: It's a very traditional global long-short fund. What we do is manage risk. Before we think about return, we think about what the downside is in an investment. The idea is really to preserve capital while trying to grow it.

TS: One sector in which you are bullish is big-cap tech. You own stocks like Microsoft , Cisco and Intel . Why do you like these companies when there is so much worry about their growth potential?

Roseman: The holy trinity used to have concerns about domestic GDP and investors were exclusively worried about domestic GDP. Today they are beneficiaries of global GDP and, frankly, they benefit as the world becomes more wired and wireless. They are trading at the cheapest multiples they have ever traded at. If you net out cash, they are trading at high single-digit multiples of earnings.

One small-cap company you like is Global Ship Lease. Tell me about this one.

Roseman: It is somewhat of a complicated story, but it has a dividend that is payable in arrears. Its accumulating a dividend that will be payable later in the spring. In addition, it has an ongoing dividend which will be about 92 cents. As a consequence, it's trading about half the valuation it should be on a yield basis.

TS: Staying with the nautical theme, you own West Marine.

Roseman: The punch line for West Marine is that they are the last man standing. The industry consolidated and, frankly, collapsed during the downturn. They are a boat-supply retailer, so they cater to both recreational boaters as well as professional boaters, in other words, lobstermen and fishermen. They are benefitting from the changes in the industry.

They are trading at a 9% free cash flow yield and have a fortress balance sheet. And they will benefit from moves they are making in their own business as well as the recovery in the broader economy.

TS: On the short side, you are bearish on mall real estate investment trusts. With economic growth accelerating, why don't you like malls?

Roseman: Retailers, by and large, are not growing. Moreover, mall REITs have more competition today than they have ever had. A lot of large-box retailers are actually looking to lease out space. They have become de facto competition for the mall REITs.

Speaking very specifically though, mall REITs are paying out dividends that they can't afford to pay. They are trading at artificially low dividend yields because the money flooding back into the market is seeking yield. Investors have been seeking yield, and they have pushed down the yields on these stocks to historically low levels. And the fact of the matter is that their dividends are at risk.

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