October 2006 : Being Different - Traits of Successful Fund Managers


"You can’t buy what is popular and do well." - Warren Buffett

Being above average requires being different. Simple logic tells us that it’s not reasonable to expect a different outcome unless we are willing to do things differently. That means sometimes being out of sync with the herd. There is no other way. Some call it contrarian investing, some call it independent thinking.

Realistically, being different will also entail occasional periods of under performance. An extreme example occurred at the height of the speculative mania for internet and technology stocks in 1999. Our current selection of managers lagged the average balanced mutual fund, falling in the bottom half of their peer group in 1999.


However, they were correct in avoiding popular stocks that later wreaked havoc on many portfolios. Being out of sync temporarily was not easy. It required a resolve and commitment to their investment process that many fund managers simply didn’t have. But, it was absolutely the right thing to do, regardless of how difficult, and set the stage for them to enjoy a multi-year run of exceptionally good returns that more than made up for a temporary shortfall and went on to outperform their peers.

"Above average long-term returns require a willingness to be out of sync with the masses from time to time."

It seems the money management industry believes in a land much like Garrison Keillor’s Lake Woebegon where “all the children are above average.” But, of course, that’s impossible. For every fund manager that’s above average, there’s another that’s below average. To be sure, it’s not uncommon for them to alternate places, being in the top half for a year or two and then being in the bottom half. As we pointed out in our April 2006 Commentary, there is not one single balanced fund that was above average in each and every year for the past ten years, not even the managers that garnered cumulative ten year performance in the top 1% of their peer group.

However, there are a few fund managers (see your portfolio holdings for some specific examples) that tend to be above average more often than their peers. In doing so, they have posted five and ten year performance records that surpass 90% of their peers. What do these “best of the best” fund managers share in common besides enviable long-term records of above average performance? What are some of the traits that make our selected mutual funds and their managers different?


Solid Investment Process: The single most important commonality among successful mutual fund managers is, without exception, the quality and soundness of their investment process. A solid investment process is absolutely essential to good long-term investment results. The investment process used by successful managers to make investment decisions is well thought out, possesses a simple clarity, and is followed religiously. Luck might work in the short run, but skill (a good investment process) is the path to long-term success. Without a solid investment process, there is simply no other way to obtain long-term investment success, regardless of how many of the other traits of successful managers are adopted.

Value Investment Style: The balanced fund managers we have selected are “value” investors. They use an intrinsic value investment approach to look for stocks and bonds they believe are priced well below their true worth, and then wait to reap the profits that accrue when others recognize the true worth of these bargain basement gems. It’s all about “what you get for what you pay,” much like if you were buying a car, a television, or a vacation trip. This is in sharp contrast to a “growth” investment style that hopes to ride the continued momentum of a "hot" stock.

Below Average Portfolio Turnover: One might think that managers with the best results obtain their advantage by being more active. This is not true. In fact, lower portfolio turnover is generally a common trait among the most successful balanced mutual fund managers. Heightened activity is not the path to good results, contrary to what brokerage firms would like you to think.

Geographic Location: Although Boston and New York City are the mutual fund centers of the world, practically none of the managers of our top holdings hail from either city. Instead, you’ll find them in places like Minneapolis, Kansas City, Lutherville (Maryland), Los Angeles and San Francisco. Warren Buffett says you can think better when you’re not caught up in Wall Street. That’s one of the reasons he likes Omaha.

Owner Operated: Much like a local restaurant, owner/operated funds seem to have a higher standard of care than non-owner/operated establishments. It’s much more than just a job to them. We like managers that invest their own money in their own funds (similar to our company pension plan investing in the same investments we select for our clients.)

"Our investment strategy harnesses the brains, research and abilities of a select team of the very best balanced fund managers we can find."

Our investment strategy harnesses the brains, research and abilities of a select team of the very best balanced fund managers we can find. Their accomplishments speak for themselves. Although past performance does not guarantee future performance, and no assurances can be given concerning future investment results, we believe that funds with histories of exceptionally good performance, spanning periods of up markets and down markets, are logical candidates to continue to achieve above average results for you going forward.

We thank you for the faith you have placed in us and for entrusting us with your investment assets.***

Greg Schultz & Bruce Grenke
© 2006 Asset Allocation Advisors, Inc.