Industry Critic Offers a 'Bottom-Up' Strategy
Sunday, July 23, 2006
Louis Lowenstein, a button-down 81-year-old emeritus finance and law professor, is positioning himself to become the mutual fund industry's most urbane critic. Listening to him talk about his book in progress, which he promises will uncover the "shame" of the fund industry, is like watching a man sharpen his sword to do battle with a tank. One can't help but wish him well.
Over the past two years, Lowenstein has given speeches and written articles that parsed the performance of the industry's largest funds and found them lacking. He discovered that a group of value funds run by buy-and-hold investors repeatedly beat the largest funds from household-name fund companies. The value investors he studied also avoided buying almost all the bubble-year debacle stocks. (Although one bought Nokia Corp. and sold it for a 1,900 percent profit.)
In a January paper he wrote for the Center for Law and Economic Studies at Columbia Law School, which later became an article for Barron's, he compared 15 large-cap growth funds with 10 value funds.
The large-cap growth funds, chosen because they were the largest in assets at the end of 1997, had negative returns of 8.89 percent a year for the five years ending Aug. 31, a bigger fall than the 2.71 percent drop experienced by the Standard & Poor's 500-stock index in the same period. But the 10 value funds Lowenstein selected had positive returns of 9.83 percent for the period.
Lowenstein's 10 value funds were recommended to him in 2004 by Robert D. Goldfarb, the chief of the Sequoia Fund, which has all the characteristics Lowenstein finds admirable in a fund. (It's closed to new investors.)
The funds were Clipper Fund, FPA Capital, First Eagle Global, Mutual Beacon, Oak Value, Oakmark Select, Longleaf Partners, Legg Mason Value, Source Capital and Tweedy Browne American Value.
Six are open to new investors: Clipper Fund, Mutual Beacon, Oak Value, Oakmark Select, Legg Mason Value and Source Capital. The fund managers at Clipper and Mutual Beacon left last year, and Mutual Beacon is now part of Franklin Templeton Investments.
Asked this month for funds he'd recommend, Lowenstein mentioned Fairholme, Longleaf Partners International, FPA Perennial and FPA Paramount, and Oakmark Select.
Managers of these funds have "discipline, patience, long-term perspective and, for want of a better word, a sense of fiduciary duty," he said in an interview. "They're investing in companies, not markets."
Lowenstein quotes Jean Marie Eveillard of First Eagle Global, whose investors excoriated him for sitting out the boom stocks of the go-go years. Eveillard responded, "I would rather lose half my shareholders than lose half my shareholders' money."
Still, the funds are for long-term investors who are not afraid to lose money -- sometimes a lot of it -- in the short term.
Longleaf Partners International, which reopened to investors June 10, lost 16.5 percent in 2002. Investors who bailed out then had plenty of time to kick themselves later: The fund gained 41.5 percent in 2003. Oakmark Select has a five-year average annual total return of 6.60 percent, but lately it's been in the dumps. Its year-to-date return is 1.73 percent, and it was down 0.77 percent for the three months ended June 30.