Portfolio
Managers of Mutual Funds: “Who are
these guys?” –Butch Cassidy and the Sundance Kid
Any
good investment advisor who manages portfolios of mutual funds spends a lot of
time reading Barron’s, looking at various statistics in The Wall
Street Journal and reviewing analysts’ reports from Morningstar. With an objective of providing our clients
access to the best mutual funds in the world, we take the due diligence process
a big step further. We’ve always
believed that one of the features that distinguishes our firm from other
investment advisors is our on-site visits with the mutual fund portfolio
managers. We are repeatedly told by
fund managers that very few investment advisors visit their offices; however,
we find the practice to be an invaluable part of our process. The trips not only give us an opportunity to
discuss views on the economy, management styles and specific investments with
the fund managers, but they also provide us a chance to talk with these people
in their own surroundings and to understand their culture.
Over
the last year, we have made trips to Chicago (three times), New York (twice),
Omaha and Memphis. Our latest trip,
which is recounted below, took place in January when Tim, Kevin and Stacey
(Cecil stayed behind to protect our clients’ money and the state’s treasury)
traveled to New York to visit the managers of seven different mutual funds.
Wednesday,
January 9: Getting to N.Y.C.
Beyond
the obvious explanation, another big reason the Jackson airport looks empty
these days is that it is very hard to find reasonably priced flights
originating from here. So, on Wednesday
morning we drove to New Orleans to catch a non-stop flight to New York on US
Air, at one third the cost of a Jackson flight. Our mentality is well engrained:
we spend like we invest - only at the right price! We arrived at LaGuardia and later had dinner
with two financial planning counterparts from California and Colorado. We noted the unfortunate circumstances of
the hotel industry in New York as our room at the New York Helmsley was 1/3rd
less than what we had paid only a year ago.
Much like investing, travel can be its most favorable when fear is at
its height.
Thursday,
January 10: A Whirlwind “Who’s Who”
Tour Begins
Thursday
morning began early with a car ride to Short Hills, New Jersey to see David
Winters, president, chief investment officer and portfolio manager at
Mutual Series. With 15 years at the
firm now under his belt, David is the heavyweight after the departure of
Michael Price a few years ago and a more recent reorganization. He related in detail the evolution of the
firm, and his description left us with a good feeling that there is a solid
team in place and that the investment style remains intact, i.e., “we like
three things: cheap stocks,
bankruptcies and merger arbitrage.”
Several times David stressed his cautious approach and concern about not
losing money, stating “people want to eat well and sleep well.” The funds’ results certainly reflect that
sentiment - they have been terrific during a difficult last two years and over
longer periods as well. During a social
moment, an observation was made about a morning news item: the hiring of Steve Spurrier as football
coach of the Washington Redskins. “Who?”
was Winters’ response. To our bemused
reaction, he said, “I spend all my time reading corporate annual reports.” To prove the point, he shared with us his
Christmas card from last year. It was a
picture of him sitting in a canoe on a scenic lake surrounded by beautiful,
snow-capped mountains - he was obviously on vacation - and he was reading an
annual report!
We
hustled back to Manhattan for our get-together over lunch with TIAA-CREF
(Teachers Insurance and Annuity Association - College Retirement Equities
Fund), one of this country’s largest money managers. Managing Director Carlton Martin and Senior Managing
Director Hans Erickson described their firm’s Dual Investment Management
Strategy which combines active equity management with indexing. Their view of risk differs significantly
from the managers with whom we invest.
Their strategy focuses on reducing relative risk - that is, the risk of
differing from an index - and thus, they tend to produce results akin to the
Dow Jones Average or the Standard and Poor’s 500.
Our
next stop was at Davis Selected Advisors, the managers of the Selected American
Fund, a long-time holding of our firm.
Selected seeks an all-weather, long-term approach and has produced an
outstanding track record investing in world class companies; however, 2001 was
a difficult year - down 11.2% - and they admitted it right out of the box. Portfolio managers Chris Davis and Ken
Feinberg pride themselves on their analytical abilities and describe their
firm as a think tank with an objective of achieving constant learning and
growth. Analyzing their mistakes is
essential to meeting this objective, and as a part of this postmortem approach,
they hold a monthly “Mistakes Meeting” and further, have framed stock
certificates of their major mistakes above the office water cooler. We like this type culture.
From
49th and 5th, we headed east to Park Avenue and the
offices of Tweedy, Browne where we met with Managing Directors Will and
Chris Browne, Tom Shrager and Bob Wyckoff. The recipient of the International Stock Manager of the Year for
2000, the Tweedy team is one of our favorites.
They are independent thinkers, and their investment principles derive
from the work of the late Benjamin Graham, professor of investments at Columbia
Business School. Will Browne provided
an interesting history of Tweedy, telling how Graham was a customer of the firm
when it was a broker/dealer in the 1940s.
At the time, Warren Buffett and Bill Ruane were working for Graham as
analysts. In the late 1950s, Tweedy
became an investment manager, and in the mid-1980s began buying international
stocks. They have been among the best
in long-term performance, and we take great comfort in knowing that the
principals at Tweedy invest their own money alongside that of their
clients. Realizing that Bob Wyckoff was
a University of Florida graduate, we asked about the departure of
Spurrier. Will Browne twisted up his
face and said, “Who is Steve Spurrier?”
We’re in good hands at Tweedy, Browne.
It
was time for dinner at a popular steakhouse adjacent to Grand Central Station
with Jean-Marie Eveillard and Charles de Vaulx of First Eagle
SoGen. Not only did Jean-Marie and
Charles follow Tweedy in our meeting lineup, more importantly they followed
them as Morningstar’s International Stock Managers of the Year, having recently
been named recipients of the prestigious award for 2001. Clients of our firm may remember Jean-Marie
from our client dinner in 1998, when among other observations, he panned the
stock of WorldCom. Jean-Marie and
Charles consider themselves analysts as much as portfolio managers and find
picking securities in Europe to be easier than in the US. Jean-Marie noted that corporations in Europe
are much less in debt, and the quality of their earnings is higher. He opined, “If anything, earnings in Europe
are understated.” In direct contrast to
the strategy espoused at TIAA-CREF, First Eagle SoGen made it clear that they
make no attempt to hug a stock market index.
Friday,
January 11: A Wily Investor Provides a
Little Entertainment
We
had to get our engines revving quickly because our first appointment was with
the colorful seventy-something Marty Whitman, portfolio manager for
Third Avenue Value. As an expert in the
field of bankruptcy, Marty is one of the most well-known, respected and
accomplished value investors around. He
is also one of the most quotable.
During the course of discussing some of his favorite investments, Marty
commented on a popular stock brokerage firm, “From a business point of view,
their marketing is more important than security analysis - that’s what I like
about [them].” Unfortunately, some of
the more entertaining lines are probably not suitable for this piece. Marty spent most of the meeting covering the
investment fronts where he is currently finding the most opportunity. One of those areas is distressed debt where
bonds of bankrupt companies like Kmart sell for huge discounts. Marty calls it “the great new takeover game
- either pay me or give me control of the company.” He went on to say, “In that business, if you’re not the squeaky
wheel, you are going to get screwed.”
That’s why he’s only taking on sizable positions (50% or more of the
outstanding bonds) in a senior creditor status.
We
hailed a cab for the trip to Lower Manhattan to meet with Goldman Sachs, just a
couple of blocks from Ground Zero.
Goldman profiled two of the funds they manage in the “active growth and
active value spaces.” Much of the
discussion centered on a money manager in Tampa which Goldman acquired to run
its growth equity portfolio. We also
talked about their recently importing new leadership for a value product which
had lacked some consistency. Whereas
many of the firms we use grow their talent, we get the sense that Goldman buys much
of theirs. A memorable point in the
meeting occurred when we heard a loud crash from below. As we looked out from twenty or thirty
stories up, we spotted a crane dumping twisted steel from the World Trade
Center onto a barge to be transported to Staten Island - a very sobering
moment.
With
that, we headed to the airport for the journey home: a shuttle flight to Philadelphia, the flight down to New Orleans
and the three-hour car ride to Jackson.
It was our version of “Planes, Trains and Automobiles.”