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Mutual Funds
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| | Mutual Funds
2 mutual funds you can trust
Tweedy, Browne's offerings are the first to make the 'Clean Funds' cut. Now, I need your help to find more.
By Timothy Middleton
Just as my colleague Jim Jubak has been panning for clean stocks amid Wall Streets dross, Ive been on the prowl for clean funds.
Im looking for investor-friendly attributes such as low expenses, management independence, insider ownership and superior shareholder returns. Most of the funds caught up in the current scandals fail to meet these criteria.
I've found a likely prospect across the street from the Waldorf Astoria in New York.
Here at 350 Park Ave., the swankest stretch of the most glamorous boulevard in Manhattan, are the offices of Tweedy, Browne. This venerable investment boutique is prudent, vigilant, cheap and very successful.
They have a real focus, says Timothy Medley, a financial adviser in Ridgeland, Miss., whose clients have substantial investments with the firm. Its sort of like catching the train from New York to Washington. They get up every week and do it; they dont get off in Baltimore and look around.
The spiraling scandals infecting funds have implicated some of the industrys best-known names, including Janus Capital Group (JNS, news, msgs) and Putnam Investments. Investigating authorities have said dozens of fund complexes not yet publicly identified may be guilty of rule-bending or breaking.
Keeping it clean
Ive been digging through Securities and Exchange Commission filings for months now, trying to separate trustworthy companies from the others, and Im confident Tweedys white shoes are unmuddied. My visit last week only reinforced my view.
Governance has emerged as the defining issue in the scandals, because the common thread running through them is marketing abuse. On this issue, Tweedy is Caesars wife -- or perhaps Caesar himself. The tiny firm, which doesnt have a marketing department, triggered the discovery of misspending at Hollinger International (HLR, news, msgs) that forced Conrad Black to surrender his chief executive title.
At a time when were all questioning the fund families we invest in, this one is an extremely shareholder-friendly firm, says Kunal Kapoor, associate director of fund analysis for Morningstar.
By every metric except one that doesnt matter, Tweedy, Brown mutual funds are the kind you want. The meaningless measure is relative performance, as calculated by Morningstar. It appears to be awful, but its not. Morningstar screwed up.
Tweedys flagship, Tweedy, Browne Global Value (TBGVX) shot up 21.3% in this year's first 11 months. That compares with a 14.9% gain for MSCIs EAFE (foreign-stock) Index, when foreign currencies are hedged back to the U.S. dollar, as Tweedy does. (Tweedy hedges currency risk because it makes returns less volatile.)
The firms other fund, Tweedy, Browne American Value (TWEBX), advanced 18.8% through Nov. 30, compared with a 23.7% gain for Vanguard Value Index (VIVAX). In both cases, however, Morningstar compares the funds to other, inappropriate, benchmarks and scores them toward the bottom of their respective heaps.
Watching the sodium
You have to take our relative rankings with a pinch of salt, Kapoor confesses.
The Tweedy, Browne funds you can take salt-free.
Tweedys name has been mentioned in my columns several times since the scandals broke in September, particularly with regard to the fact that the companys principals and employees are among the largest investors in their own portfolios. Scandal-prone funds are seldom owned by their managers.
Tweedy has $8.2 billion in assets under management. Global Value has assets of $4.8 billion and American Value of $738 million; the balance is in privately managed accounts. Tweedy insiders, according to the funds most recent prospectus, have invested $344.4 million with the firm, nearly $45 million of that in the Global fund and $32.2 million in American Value.
The firms value discipline comes from its long association with Benjamin Graham, author of "Security Analysis" (a profession he virtually invented) and "The Intelligent Investor." Tweedy was a brokerage firm in the 1930s, '40s and '50s, and Graham-Newman Corp. was a prime customer.
When Graham retired, one of his protgs, Tom Knapp, joined Tweedy and organized its investing arm, which has since taken over the entire firm. Another value-investing legend, Walter Schloss, rents office space from Tweedy.
Knapp has since retired. Todays Tweedy, Browne has five owner-partners. Only six others have ever been principals of the firm. Remarkably, as the firm says of itself at its Web site, No managing director or former general partner has ever left Tweedy, Browne to join another investment firm.
Strict guidelines
Graham insisted on buying stocks in strong companies with low prices relative to their book value, earnings, sales and cash flow; low debt; an above-average dividend yield; and such investor-friendly attributes as significant insider ownership and a policy of buying back shares at low prices.
It can take value a long time to be discovered, which leads to low turnover at Tweedy funds -- another attribute of anti-scandal portfolios. Tweedy Global Value has turnover of about 8%, implying an average holding period of more than 12 years.
That in turn leads Tweedy to watch over its companies carefully. Such a review earlier this year led to the shakeup at Hollinger. Although Tweedy mutual funds are diversified, and no individual position accounts for more than a few percent of assets, cumulatively Tweedy owns about 17% of the publishers outstanding common.
Robert Wyckoff Jr., one of the firms partners, explains that it began taking a stake in Hollinger in 1999, at an average price of around $11 a share. Last year, however, it discovered SEC filings that aroused its suspicion that Hollingers management was self-dealing with the companys assets, which include The Chicago Sun-Times and The Jerusalem Post.
Management-fee payments were being made by our company, Hollinger International, up to a company that Conrad Black controlled, he says. We also became aware of some asset sales he made in Canada in which he entered into covenants not to compete and in return was paid -- he and his management team -- in funds that were payments to them personally, as opposed to Hollinger International.
Uncovering worrisome dealings
Earlier this year, Tweedy demanded that Hollinger investigate, and Black subsequently resigned as CEO. Hollingers share price, which had sunk into single digits before Tweedy spoke up, has since rebounded to around $15.
Christopher Browne, another partner, says: Conrad told us we were acting against our own interest by doing this. But since then the stock has doubled. I dont think he understood what a discount he gave the stock.
Tweedy values the shares at $19. The firm sells positions that reach its estimate of companies intrinsic, or private-market, value.
Just as Tweedy demands thrifty managements from the companies in which it invests, it provides the same to its shareholders. Global Value has an expense ratio of 1.37%. Morningstars foreign large-capitalization category has an average ratio of 1.61%.
(Tweedy doesnt fit into any of Morningstars categories, however, because it's an all-capitalization investor. About half of Global Values holdings are large and the other half a blend of small and mid-size. The same is true of American Value.)
Funny-business funds almost invariably have above-average expenses.
Despite its Park Avenue address, Tweedys offices are small -- only two-thirds of a single floor, about 15,000 square feet in all, housing a total of 45 employees. The trading room has only a few desks with a handful of phones and computer screens. This is a desirable attribute in todays climate. Tainted funds have tended to come from fund factories relentlessly trying to grow their own, rather than investors, assets.
A certain focus
As Medley, the adviser, says: When you go to Tweedys offices, you cant go two floors up and visit the growth fund. Im very fond of firms that just try to do one thing very well.
One dimension to the recent fund scandals is rapid trading in funds, particularly foreign funds. The SEC has proposed redemption fees to discourage the practice. Tweedy Global Value already has them -- yet another sign of prudent management.
My search for clean funds hasnt been entirely successful. Last week, Heartland Funds and its boss, William Nasgovitz, were accused by the SEC of insider trading. I recently named Nasgovitz one of the five best fund managers in the industry.
Nasgovitz wasnt caught up in the current scandals: Hes accused of tipping off a friend to the looming collapse three years ago of municipal bond funds that have since been dissolved. I acknowledged the muni mess in my column about Nasgovitz and said he showed bad judgment. Obviously, it was worse than I thought. (Nasgovitz is not accused of selling his own considerable holdings in the muni funds, and he reportedly denies wrongdoing.)
So feel free to sprinkle some of Morningstars salt on my views. But my personal bottom line is that the odds favor funds like those of Tweedy, Browne.
Meanwhile, I look forward to your nominations to the clean-funds list. Send them to me at timothy@middleton.net or post them at our Start Investing community. Ill follow up in coming columns.
At the time of publication, Timothy Middleton owned the following securities mentioned in this article: Tweedy, Brown Global Value and Heartland Value (HRTVX). He was also a shareholder in one of the failed muni bond funds, although it was a token position of about $100, for which he received $27 in the settlement.
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