(PUB) Morningstar FundInvestor

Consistent Strategies, Bumpy Returns Continued From Cover

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Managers and analysts are capitalists, and they greatly prefer a structure where they own a part of their firm. Essentially this is a partnership structure where key contributors buy in after a number of years and sell when they leave. Kind of like a good mutual fund, it’s an excellent structure for building long-term wealth, but it doesn’t help you get rich quick. Dodge & Cox has this structure, and so does Primecap, and American funds comes close, though it doesn’t have as strict rules on selling shares back. Montag & Caldwell and Longleaf both have that structure. Holders of their funds know these firms won’t be selling themselves, so they can feel comfortable about owning these funds for the long run. An OK Ownership Structure Royce is owned by Legg Mason, but the firm main- tains minority ownership and has tremendous autonomy. This is an adequate setup, as it limits meddling from above and provides some level of ownership to managers and analysts. The deal has been in place for a number of years with no apparent problems with Legg Mason. Still, it falls short of the setup above because both ownership and control are limited. On the positive side, it is owned by an asset manager, and that’s far better than being owned by an insurer or a bank, as many managers have told us over the years. One Firm, One Strategy After visiting giant fund companies that have nearly every strategy under the sun, Montag and Longleaf were refreshing changes. The firms really have only one strategy each, and that strategy hasn’t changed for 30 years. As Mason Hawkins of Longleaf said, “We only want to hire someone who already appre- ciates the power of buying a dollar for 50 cents.” Longleaf is all about the compounding potential of buying a company at a big discount to its worth. It’s so important that it will let cash build in waiting

for the bargains to arrive and it will concentrate holdings in a compact portfolio. Everyone at the firm believes in this concept. Thus, while we can’t be certain how well the next generation will execute that strategy, we can be quite confident it will stick with the strategy. At Montag & Caldwell, the focus is on steady growth. It wants companies that can sustain at least 10% growth, and it wants to buy them for at least a 10% discount to Montag’s estimate of their value. Thus, you have a focused portfolio of high-quality stocks like Google GOOG and Estee Lauder EL . Each firm has had its ups and downs, but neither wavers in the least on strategy. Returns are bumpy, like most focused strategies, but you have tremen- dous stability in management and strategy. I’ve dis- cussed how investors hurt themselves by changing strategies and shifting assets, and some portfolio managers do a little of that, too, as they tweak their strategies to address past failings only to find those tweaks cost them money down the road. At Royce, things are a bit more diffuse. Just about everything is small-cap and value-oriented, but there are quite a few flavors of that depending on the managers. Analysts write reports on small caps around the world to serve the managers, but each manager follows a somewhat different strat- egy. Charlie Dreifus favors cheaper and smaller names than most at Royce, while Chuck Royce likes a little higher-quality and tends to move around the mid-cap border. Whitney George sprinkles in some materials stocks, giving him a more cyclical portfolio. Should one of them retire, their funds might be a little different under the next manager. However, Royce, like Longleaf and Montag, hews to its strategies through thick and thin. As Chuck Royce told me, Royce funds were largely in redemp- tions throughout the 90 s and they didn’t waver.