Top Fund Manager Looks for “Perfect Balance Sheet” to Find Opportunities

Sandy Rufenacht, manager of the Aquila Three Peaks Opportunity Growth Fund, has outperformed many of his money management peers by focusing in on companies that are paying down debt. Rufenacht’s “return on debt paydown” method looks for firms that have outstanding debt but have a desire and/or ability to pay down debt over time. The manager looks to avoid cyclical industries in favor of recession-proof industries such as supermarkets and health care. “What I’m really looking for,” he said, is “free cash flow.”  When debt goes down, debt-servicing costs decline, credit profile improves, and the company can get rid of restrictive covenants and refinance.  Then, the company buys back stock, getting the market’s attention, “and the stock flies!”

The strategy appears to be working.  The Aquila Three Peaks fund produced returns higher than 97% of its peers over the last year (8.4%), and better than 99% of its peers over the last three years (22.1% annually) and over the last five years (19.4% annually).  Rufenacht says that the root of his strategy is a simple principle: “When you borrow money, you pay it back.”