Financial Jungle

The Public Be Damned… you may quote me: Screw ‘em.

That was the remark from legendary value manager, Marty Whitman, cursing fickle investors for fleeing his Third Avenue fund in favour of the more glamorous technology stocks. The exodus shaved his Third Avenue fund’s assets under management from $50 billion to $38 billion in 1998 and 1999. But guess who’s having the last laugh as the Third Avenue fund is enjoying a 9.95% average 10-year run. Compare that to S&P 500’s 5%!

Marty Whitman has always believed in his value philosophy, which is why he invests the bulk of his wealth alongside investors’. With so much at stake, he can also afford to focus on his long-term objectives in the face of short-term adversities. For Third Avenue, giving Whitman the pink slip is never an option given his revered status. Not to mention Whitman basically runs his own show at the firm.

Other mutual fund managers? Hmm…. not so lucky. Several quarters of persistent lousy performance and you’re out!

So why are mutual fund companies so fixated on short-term returns? Don’t look around. Look at ourselves. We’re the culprits. I once had a colleague, who’s brilliant at what he does, but he said to me, “I pick my RRSP mutual funds based on last year’s performance.” This is how most of us are wired, which is why fund companies are so wildly successful at promoting products catered to our myopic views.

According to an article by Martin Gale, most managers’ interests aren’t aligned with investors’. Judging from how managers are compensated, it’s no wonder why 80% of managers fail to beat the market. They’re not paid to beat the market!

It’s simply not good enough to invest with the manager with the most morningstar stripes. In addition to a strong track record of eclipsing the market, the manager must also “eat his own cooking.” After all, if the manager refuses to eat his poison, why should you?

In 2006, Boston Business Journal surveyed 75 locally based fund filings and discovered that 37 funds had zero dollar invested by their own managers. If a manager doesn’t invest the bulk of his wealth in his own funds, then he’s simply a well-compensated employee whose paychecks depend on MER and assets under management (AUM), not investors’ return. The easiest way to grow AUM is by selling the hottest trends; the ones that made the most money last year. Think back at the height of the Internet bubble. What attracted weak money? Nortel or oil stocks? Fast forward 8 years, which one enriched investors handsomely?

I recently came across an interesting article on Reaping What They Sow. The Denver Business Journal came up with a list of US fund companies where managers were investing heavily in their own funds. The article doesn’t go into performance, so I decided to do a little digging on the top 3 firms: Marsico Capital, Jenus Capital, and Cambiar Investors.

• Marsico Capital has 6 funds under managment: Focus, Growth, 21st Century, International Opportunities, Flexible Capital, and Global. All have beaten their respective benchmarks. 2 funds have 10+ year histories. Managers invest an average of $900k in the funds.
• Jenus Capital has too many funds to list. But their 38-year-old flagship fund, Jenus Fund, has beaten S&P500 by 2.4% a year. Managers invest an average of $675k in Janus mutual funds.
• Cambiar Investors has 3 funds under management: Large-cap, Small-Cap, and International. All have beaten their respective benchmarks. Managers have an average of $559k invested.

If you don’t recognize these U.S. firms, I’m sure you have heard of Warren Buffett, Jim Rogers, Eddie Lampert and George Soros. They, too, have their skin in the game.

Robert Rodriguez was voted by CNN Money as the best manager of our time. Since the mid-1984, his FPA Capital has shattered the S&P 500 with a 3.9% winning margin. He’s a smart dude, but guess what. He’s also the largest shareholder of his fund.

You might recognize value-investing firm, Tweedy Browne. Their flagship $6.7 billion Global Value fund has beaten the MSCI EAFE index by 4.5% a year since 1993. The current managing directors, retired principals and their families, and employees have $91.6 million locked up in the Global Fund.

MorningStar International-Stock Fund Manager of the Year winner, Hakan Castegren, invests over $1 million of his money in his Habor International fund, which commands twice the EAFE index’s 20-year annualized return.

Looking north of the border, there’s Irwin Michael, whose Fundamental Value fund trashed the TSX by a whopping 6% a year since 1990. He invests his family’s savings in his funds.

Don’t forget Francis Chou, whose Chou Associates and Chou RRSP have compounded returns of 12.4% and 10.6% respectively, despite being somewhat of balanced funds.

What about Wil Wutherich? He’s a new to SteadyHand, but not new to wealth management. His Small-Cap fund annualized 17% over a short history so far. Wil Wutherich is also stuffing his money where his mouth is.

Although 80% of “professional” money managers underperform the market, keep in mind that real professionals have skin in the game. While picking a manager with a large stake in his own funds alone doesn’t guarantee extraordinarily results, at least it weeds out the uncommitteds; the ones not paid to beat the market.