Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
Fund Managers Who Invest with You
06/27/2014 10:00 am EST
Ari Charney, editor of Personal Finance and other leading publications from Investing Daily, looks at fund managers who invest alongside their shareholders, by holding stakes of $1 million or more in their funds.
Steven Halpern: Our guest today is Ari Charney, editor of several of Investing Daily's most popular newsletters including Big Yield Hunting and Personal Finance. How are you doing today, Ari?
Ari Charney: Great. Thank you for having me.
Steven Halpern: Your latest special report focuses on top fund managers who also happen to invest alongside their shareholders. Could you expand on that?
Ari Charney: Sure. Prior to joining Investing Daily about three years ago, I spent nearly eight years at the Hulbert Financial Digest and one of our big focuses there—the Hulbert Financial Digest (HFD)—was a newsletter that tracked and reported on the investment performance of other newsletters.
Our guy there, Mark Hulbert, was very much focused on risk and how investors tolerate risk. This article idea is, sort of, an outgrowth of that. You can know theoretically that a mutual fund has a great long-term performance. Most investment professionals look like geniuses when they ride a bull market higher, but then, what happens when the market takes a turn for the worse.?
Well, if you know that your fund manager as sufficient investments of his own in the fund that he runs and he's in it alongside you during downturns, I think that's just another way to help investors stay invested with the fund through thick and thin. It also helps to know that their incentives are firmly aligned with shareholders.
I think, sometimes, professionals who have been at it for a while can have a sort of natural cynicism toward what they do, but, when you've got your own money on the line, I think that cynicism gets put aside and there's no disconnect from what you're doing professionally.
Steven Halpern: Investors are familiar with insider ownership being reported for public companies, but how could you tell what ownership a manager has in their own fund? In addition, what level of ownership were you looking for in this latest report?
Ari Charney: Most mutual fund investors are probably familiar with the prospectus, but there's actually a somewhat more obscure document called the Statement of Additional Information (SAI).
Among the various information that this document lists—and, by the way, you can find this document, it's always going to be listed on the fund company's Web site, along with their other literature such as their quarterly reports and their annual reports as well as their prospectus—or you can find all this aggregated on Morningstar.
Anyway, the Statement of Additional Information (SAI), the SEC has required mutual fund companies to list the dollar amounts that their fund managers have invested in the funds that they run since about 2005. These investments, they're not specific, that's the only shortcoming.
They are generally listed in ranges, in broad ranges so, if you look at the—for fund manager it might say, this fund manager has $50,000 to $100,000 invested in the fund, or $100,000 to $500,000 or I think the top threshold maxes out at over $1 million. You won't get a precise dollar amount but it's better than nothing.|pagebreak|
The one other thing I wanted to point out is that, particularly with some of the boutique fund companies, the smaller fund companies; they'll also do private account management.
Some people pointed out—well, to go by the SAI doesn't always reflect the extent to which a fund manager is invested in the strategy—because they might have other private accounts that they run that are similar or nearly identical to the mutual fund strategy in which they have significant assets invested, but we've got to go by the public information to which we have access, and so for retail investors it's the SAI.
Steven Halpern: At what level of ownership were you looking for when you picked the three funds that we're about to discuss?
Ari Charney: The ones that we were looking at, which were all domestic US Equity funds, we were looking for lead managers that had at least $1 million invested in the fund.
One thing to note is that a fund investor shouldn't view a mutual fund manager's ownership of his own fund dimly if it's for certain niche funds, so it wouldn't make sense for certain types of bond funds.
For instance, where a fund manager—if it's like a California Municipal Bond Fund—if the fund manager lives in another state and wouldn't benefit from tax advantages in investing the fund. You wouldn't, for instance, penalize a fund manager for not having significant investments in a fund like that.
Also, if a fund strategy is just more niche. Say, for instance, if it were purely a micro-cap fund, than you wouldn't necessarily penalize a fund manager for not having a huge amount of assets and that would make sense for them to have a smaller slice of their assets invested in such a fund.
Generally speaking, if you are looking at a large US Equity fund and the fund manager has been at the helm for a while, I would say it's fair to demand that they have at least $500,000, if not $1 million or more of their assets invested alongside shareholders.
Steven Halpern: Let's first look at T. Rowe Price Blue Chip Growth (TRBCX), where manager Larry Puglia has been at the helm for over 20 years. Could you tell us a little about this fund?
Ari Charney: Sure. That fund has gained 8.8% annually over the past ten years, beating the S&P by an average of one percentage point per year, which doesn't sound like much, but when you translate that into total return it's actually a pretty wide goal in performance.
The term blue chip is in the name of the fund, but that shouldn't lull investors into thinking that this is going to be a snoozer. He invests in cyclical fare. He's not afraid to go into fast growing names.
Generally speaking, he looks for companies that are established, that have strong market positions, seasoned management, solid financials, and, of course, he's looking for earnings growth and steady profits. The one other thing that he does is, he also avoids firms with excessive debt on their balance sheet.
Steven Halpern: You called Nicholas Fund (NICSX) a "boring market beater," and interestingly, the fund is managed by a father and son team. Could you tell us about Nicholas Fund?|pagebreak|
Ari Charney: Sure. Nicholas has gained 9.7% annually over the past ten years, beating the broad market by about two points per year. Right now it's tilted toward mid-cap names. It's a father and son team, but, I think it's important to note that it's not an instance where the son is a freshly-minted MBA who has joined the fund.
The father, Albert Nicholas or Ab Nicholas is in his early 80s and his son David looks to be in his 50s. Ab Nicholas has been running the funds since the late 60s and David has been with the fund in two separate stints for about 15 years altogether. Rejoined the fund most recently in early 2011.
One of things that makes the fund boring is they—I was sort of joking, referring to as boring because, of course, it's long-term performance is anything but boring—is the fact that they basically want to find steady earners, and then they want to buy and hold them for as long as possible.
For instance, they have one stock in the portfolio that is their longest term holding at present, is Walgreen's, and they've had that for about 20 years. Nicholas has said that you don't get gains without owning a stock and he really wants to find those steady earners and own them for the long-term.
Steven Halpern: Finally, let's look at AMG Managers Skyline Special Equities (SKSEX), which you point out deserves special attention because each of its three managers each has more than $1 million invested in the fund, so what's the story here?
Ari Charney: I find that pretty noteworthy that all three fund managers have more than $1 million. As I mentioned earlier, in each of the three funds that we're discussing, the lead manager had more than $1 million, and the last one that we discussed, Nicholas Fund, the son—David Nicholas—had reported investments of just $50,000 to $100,000 in that fund, which is a little bit disappointing, but as I know that he may have other significant assets invested in private accounts.
When you have all three fund managers who have that much skin in the game it's pretty impressive. I think it's especially impressive given the fact that this is a turnaround fund for the most part, Skyline that is, and as a turnaround fund that means it's going to generally incur more volatility or risk than the market.
That means, while it may lead the market higher during bull runs, it's going to tend to lose more than the market during bear runs. If that's the case, you really want to know that, if you are suffering in a down market—but you still want to be a long-term holder of this fund—you want to know that management is in it with you.
And if they have a million plus each invested in the fund they are going to do their very best to make sure that when the market turns around they are leveraged to that performance.
Steven Halpern: Well, we really appreciate you taking the time today. Thank you for sharing your ideas with us.
Ari Charney: Great. Thank you very much.
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