Those with a short, or selective, memory might not remember it, but not too long ago mutual funds with decades of management experience and impressive 10-year track records -- which we affectionately call "old school" funds -- were unceremoniously shoved aside in favor of start-ups run by young, untested portfolio managers.
It was a time when fickle investors showered the children of the Internet revolution with their savings. In return, the youthful managers promised them the gravy train would last forever.
It didn't even last a decade. And the resulting losses suffered by investors were an un-pleasant reminder that a manager's experience and long-term results are primary criteria when selecting a fund.
So for those investors looking to relive their bubble-era thrills by chasing performance, or those looking to switch funds simply because the market's current shiftlessness scares (or just plain bores) them, here's a look at four "old school" funds that have thrived during the booms, the busts and even today's blahs.
The fact that the
Jensen fund has returned 13.07% annually over the past 10 years vs. 11.33% for the
is not what makes Jensen an old-school fund. Nor is it because the fund's five principals have a combined 150-years-plus of investing experience.
No, what establishes Jensen as perhaps the quintessential "old school" fund is that its managers make their shareholders money the old-fashioned way: They focus on earnings. Or, more specifically, earnings divided by shareholders' equity, or return on equity.
Jensen's team screens nearly 10,000 publicly traded companies for those that have delivered an ROE of at least 15% in each of the past 10 years. The resulting 100 or so names are then given intrinsic values, according to their future free cash flows. Finally, Jensen's managers select the 20 to 30 companies trading at least 40% below their calculated intrinsic values.
"When you can maintain that level of ROE for 10 years or more it shows that a company has a sustainable competitive advantage," says Jensen portfolio manager Robert Millen.
It also means that the company can generate cash internally and does not have to dilute those all-important earnings by issuing additional shares.
Jensen screens companies regardless of size, but the process tends to favor familiar large-cap names. Nevertheless, a quick scan of its holdings will reveal a less heralded name like
alongside true, blue-chip giants like
. Cost-wise, the fund's expense ratio has declined to just 0.90%, as assets have surpassed the $2 billion mark.
Morningstar analyst Langdon Healy says the two largest risks facing the Jensen fund are its concentration, which creates company-specific risk, as well as its inability to "soar during huge market surges." Last year, for example, Jensen only returned 16.1% vs. 28.7% for the S&P 500.
Nevertheless, one year of underperformance does not faze Millen, who takes a much longer view. At a recent Morningstar conference, Millen sat on a panel with two younger portfolio managers who justified holding high flyers
, citing their reasonable valuations.
Millen responded by succinctly explaining that he did not look at either company because they failed to meet his long-term earnings criteria. Exactly the type of discipline you expect from an old-school fund manager.
A lot has changed since Don Hodges began his career in the investment industry more than 40 years ago, most notably the emergence of technology. But instead of changing styles with the times, Hodges brought his son Craig in to help him run the
Hodges fund in 1992.
"He brings a fresh approach to my traditional approach. For example, he brings me into new technologies that I might not be aware of," says the more senior of the two Hodges. "And it's not like he was ever really a rookie anyway, we've talked with each other about stocks from the time he was a little guy."
The old school/new school, father/son combination has been beating the market for a long time and there's no sense that they intend to stop now. The Hodges fund's 10-year annualized return of 13.02% trumps the S&P 500 by 1.2% and year-to-date the fund is ahead of the benchmark index by 2.11%. Over the last three-year and five-year periods, the fund has beaten the index by 13.49% and 4.09%, respectively.
The fund's strategy is a three-part mix of core growth companies, many of which are household names like
; turnaround candidates such as Texas restaurant chain
; and (three) momentum stocks receiving what Don Hodges calls "unusual market interest" like
XM Satellite Radio
The firm's relatively active management -- annual turnover in the fund is 93% compared to a rock-bottom 7% for the Jensen fund -- boosts the expense ratio to a slightly above-average 1.96%. However, the fund's consistent long-term returns and the seasoned portfolio manager at the helm more than compensate for the higher expense.
"He's followed hundreds of companies for over 30 years," says Craig Hodges of his father. "He definitely has an old-school view of the markets. And it's worked."
Weitz Value Fund
Some fund managers are obligated to be fully invested, therefore it's tough to blame them for buying at the top of the market when they are only meeting the requirements spelled out in the fund's prospectus. Other managers might not be required to have 100% of their assets in the market, but still rush to shop for stocks faster than a teenager holding both his weekly allowance and the keys to the family car.
And then there's Wally Weitz who, like Orson Welles in his TV-commercial approach to wine buying, will buy no stock before its time.
Weitz Value fund is currently sitting on 28% cash, but long-term investors are smart enough to realize that this is no money market fund. The fund's 10-year annual return is 16.36%, besting the S&P by 4.54%. The fund is also a winner in terms of cost, charging a low 1.11% for its services.
When Weitz finally pulls the trigger on a stock, it is only when his discounted cash flow model proves it to be trading at a price far lower than what he says a "rational buyer" would pay for 100% of the company. Additional requirements include pricing power, an easy-to-understand business (the fund holds few if any high-tech stocks) and an "honest, intelligent management who treats shareholders as partners in the business, rather than necessary evils."
"The beauty of this approach is that it depends on common sense and patience rather than special sources of information or predictions of essentially unpredictable future events," says Weitz.
The fund currently has a concentration in media and financial stocks with
being the top holding at 5.3%. On the financial side, both
( FNM) and
( FRE) are well represented in the fund.
Weitz is not the only old-school fund hoarding cash. The $6.7 billion
Clipper fund is also sailing on a sea of green, with 28% of its assets in cash at the end of the second quarter.
But like Weitz and a growing number of value managers, Clipper's are careful to remind investors about the imprudence of buying stocks simply for the sake of buying them.
In their most recent letter to shareholders (a document which should be required reading even for non-Clipper investors), Clipper's managers wrote the following: "Cash seems like a four-letter word, particularly given the low level of short-term interest rates which creates an almost desperate compulsion to buy long-term assets ... Rather than buy long-term assets at generous prices, we are choosing to build cash today for potentially better opportunities tomorrow."
It's easy to be skeptical of a fund manager who keeps his powder dry since there are as many reasons for not buying stocks as for buying them. But cynicism gets swept away in the face of Clipper's 16.50% 10-year annualized return, a healthy 4.68% better than the S&P. The fund's long-term returns place it in the top 1%, according to its Morningstar category, a feat which garners it the vaunted five stars from the fund-tracking firm.
Aside from an exceptional long-term track record, old-school investors can also appreciate the extensive experience of Clipper's skippers. Four of the five portfolio managers have navigated the fund since the late 1980s, with the fifth hopping aboard in 1995.
Portfolio manager Michael Sandler says the team's vast base of experience enables it to "concentrate on our best ideas." As an example, he points to the fund's conviction in buying shares of
on the way down after the Kozlowski scandal caused the price to sink below $10 dollars. Tyco has since rebounded and now trades in the low $30 range, much to the benefit of Clipper's shareholders.
"Our performance has been and will be lumpy," says Sandler. "So our shareholders have learned to be patient."