The weekly investment meetings at mutual fund shop Tweedy, Browne look and sound much like those at almost any other investing firm. Each Tuesday, the fund firm's four partners gather around a large, round table in their Park Avenue office, hashing out their views on which stocks look good and which don't. The four of them trade spreadsheets and even argue from time to time. But that's where the similarities to other funds end. When the meeting breaks up, more often than not, the partners make a firm decision...to do nothing.
Once the Tweedy, Browne managers decide to buy a stock, they hold on to it for a while. Actually, for more than a while: 10 years, on average -- a trading pace that's utterly glacial compared with that of its rivals. And some stocks in its portfolio attain even greater graybeard status. Over the past two decades, investors have traded in and out of food giant Nestl to capture the stock's short-term ups and downs; Tweedy, Browne has stubbornly held on for 18 years, chalking up a return of nearly 600 percent in the process -- about double what the S&P 500 index delivered. This kind of stasis is tantamount to heresy in a world of instant buying decisions, complex hedging strategies and millisecond computer trades. But the Tweedy, Browne team just doesn't think frequent trading does much good. "Doing nothing is an active decision," says William Browne, a managing director and the cofounder's son. "Many times, it is the best thing you can do." And the funds' numbers back his assertion; they've outperformed their benchmark indexes by, on average, seven percentage points annually for the past 15 years.
Say this for the Browne approach -- it ain't for everybody. For millions of Americans, buying stocks and holding them has backfired in recent years, leaving their portfolios not much higher, or even lower, than they were 10 years ago. In response, the mutual fund industry has quickly moved to embrace a breed of managers with quicker trigger fingers. Today, the average "actively managed" stock fund holds each stock for just over a year. But that average tells only part of the story. Of the 3,400 or so actively managed stock funds, more than 200 now trade each stock at least once every six months. Russel Kinnel, Morningstar's director of fund research, says short-term trading has grown even more popular because of the equity markets' lousy long-term performance.
But experts say there's still room for the slowpokes of the world -- at least the savvy ones. For these folks, it's not months or years that measure their success; it can be decades. And the numbers suggest their low-blood-pressure approach can make a difference. Roger M. Edelen, a finance professor at the University of California, Davis, says frequent trading can be a big -- and largely invisible -- drag on returns. Not only do funds pay commissions on every trade, but funds that trade large blocks of stock also can even affect the value of the underlying shares, keeping their investors from getting the best price. For a $100,000 portfolio, Edelen estimates, the trading habits of a high-turnover fund would generate $2,800 more per year in trading costs than a low-turnover fund. High-turnover funds can also generate startlingly large capital gains tax bills. "I don't think investors have an awareness of how critical turnover is," says Tim Speiss, chairman of the personal wealth advisers group at EisnerAmper, a New York accounting firm.
For the most part, fund investors have no idea how often their manager trades. Turnover is usually expressed as the percentage of holdings that change in a calendar year; if a fund has a turnover of 100 percent, all the holdings in the fund turn over, on average, once a year. Research firms, such as Morningstar and Lipper, and the funds themselves publish the statistic. But a growing number of financial planners are giving more attention to this kind of data. Bedda D'Angelo, a planner in Durham, N.C., likes to see fund managers change about one-third of a portfolio each year and no more. If they trade more often, it makes her uneasy, she says, because it gives the impression they're "chasing short-term results and don't have a plan."
For the Tweedys of the world, of course, that kind of shifting around is unheard of. We've found three of the slowest-trading tortoises in fund management -- and discovered they are not only keeping their costs down but also turning in some amazing results.
Tweedy, Browne Global (TBGVX)
Growth of $10,000 in 10 years: $18,400
Average turnover: Once in 10 years
Among Top holdings: Nestl , Linde, British American Tobacco
Even though William Browne's been a so-called value investor for some 30 years, there's one misconception that still rankles him. "We buy good businesses that are selling at attractive prices," he says. "We aren't rag pickers." It's understandable that Browne doesn't want to deride the stocks he owns -- after all, the mutual fund he helps run often holds those bargain-basement picks for several years. Nestl , its largest holding, has been in the fund since its inception in 1993.
Tweedy, Browne's Bob Wyckoff, left, and William Browne replace stocks in their Global Value fund only once every 10 years, on average.
Tweedy, Browne was founded as a New York based brokerage in the 1920s. The firm's value-investing tilt was influenced in no small part by one of its early clients, Benjamin Graham, a Columbia Business School professor considered by many to be the father of value investing. (For a while, the brokerage also made a client out of one of Graham's more notable students: Warren Buffett.) The firm flipped to being primarily an asset manager in the 1970s and now oversees more than $12 billion. The managers of the Tweedy, Browne funds hunt for growing businesses that trade at a 30 to 40 percent discount to what they think the stocks are worth. When a stock soars, the managers might sell it, but they often hang on if they think the business is growing rapidly enough to justify the loftier share price.
The foursome might not add many new stocks to their funds, but they aren't averse to repurchasing ones they've sold -- especially if the share price drops. Global Value has owned, and done quite well with, two German stocks for much of the 2000s: beverage manufacturer Krones and Linde, an industrial engineering firm. Managers cashed out of both completely by 2008 -- but during the financial crisis, when the shares fell back to roughly the fund's original purchase price, the team snapped them up anew. (Both stocks have since nearly doubled, and the managers have begun to trim the holdings.)
The fund can lag its more rapidly trading peers, sometimes for years. Each year between 2002 and 2007, Global Value was in the bottom half of Morningstar's rankings of foreign large value stock funds. But over the long haul, the fund stands out. A $10,000 investment in 2001 would have grown to more than $18,000, sturdily above the returns for the MSCI EAFE index, which tracks large global stocks. At the same time, Tweedy, Browne has kept portfolio turnover to a bare minimum -- with a churn rate of, on average, only 10 percent.
Roughly a third of the global stock fund is invested in consumer goods (think chocolate and beer). Tweedy, Browne funds hardly ever own stocks in the technology and telecommunications industries, because the managers are uncomfortable with the rapid obsolescence of the products. "We don't want to wake up to discover that someone has built a better mousetrap," says Bob Wyckoff, one of the firm's partners.
Weitz Partners Value (WPVLX)
Growth of $10,000 in 10 years: $13,700
Average turnover: Once in four years
Among Top holdings: Berkshire Hathaway, Laboratory Corporation of America Holdings, Martin Marietta Materials
The portfolio managers and analysts at Weitz Funds are willing to dig deep for stocks -- literally. They've been known to clamber down a potash mine in Saskatchewan, and into an underground rock quarry in Weeping Water, Neb., to see the inner workings of two companies their funds owned: Potash, a Canadian fertilizer company, and Martin Marietta Materials, a Raleigh, N.C., supplier of asphalt and limestone.
Fertilizer and rocks aren't particularly sexy, but the managers at Weitz Funds have never gone in for popularity contests. "Our game plan is to buy stocks when they are selling for 50 cents on the dollar," says Wally Weitz, who founded the company nearly 30 years ago in Omaha. Weitz says he wants to sell stocks once he sees their price reach about 90 percent of where he thinks they are valued -- indeed, the managers recently did just that, unloading their entire stake in Potash. Still, the strategy sometimes means holding on to stocks even after a big run-up. The $710 million Weitz Partners Value has owned Laboratory Corporation of America Holdings, a medical-testing lab based in Burlington, N.C., and Willis Group Holdings, a British global insurance company, since scooping them up on the cheap in late 2008. Both stocks have risen more than 50 percent since then. But comanager Bradley Hinton says the stocks are still trading around the low end of what he and Weitz think they're worth.
Even careful investors will have the occasional disappointments, of course. The Weitz Partners Value fund added WellPoint, an Indianapolis health care company, in early 2006 -- when the stock was trading at about $70 -- and sold it last year, when it was around $53. Today, it has clawed all the way back to $75, making Weitz's sell-off look especially regrettable. Hinton says they sold the stock because of the uncertainty created by the new federal health care law. "Even though the stock still looked cheap, we couldn't analyze the earnings three to five years out," Hinton says.
The Weitz Value Partners fund has had a phenomenal two-year streak -- with annual returns around 30 percent in 2009 and 2010, to handily beat the broader market. But it lost 38 percent during the tumult of 2008, roughly on par with its peers. Whether the future ushers in bull or bear markets, Weitz says that he's going to keep on buying stocks that are out of fashion. "Many investors are their own worst enemies," he says. Not only are they swayed by fear and greed, "boredom is a factor, too."
Osterweis Fund (OSTFX)
Growth of $10,000 in 10 years: $17,500
Average turnover: Once in 2.3 years
Among Top holdings: rown Holdings, Compuware, Apache
No, John Osterweis was not kidnapped and replaced by a jittery day trader. But during the financial crisis, the eponymous $1.5 billion fund that he manages wound up trading with uncharacteristic frequency. First, he swung sharply out of stocks: By the end of 2008, roughly 20 percent of the portfolio was in cash; another 20 percent was in bonds, most of them short-term. And when stocks began stabilizing in early 2009, the fund added more than a dozen new names -- a buying binge, by Osterweis's historical standards. The year was "not business as usual for us," the manager says. "But once we saw the market melting down, we weren't going to try to catch a falling knife." And the moves worked out for investors: The fund lost less than the broad stock market during the 2008 crisis and made more money than that benchmark in 2009.
If it were up to the plainspoken Osterweis, who rides horses along the Northern California coastline when not managing money, he'd leave his stocks alone for several years at a stretch. He disdains labels like "value" and "growth." He wants to buy stocks of companies that are down in the dumps (often for legitimate reasons) and then hold them for as long as it takes them to recover. And sometimes, broader trends mean the wait isn't so long. A recent example: Qualcomm. Osterweis picked up the San Diego based cell phone chip maker in July 2010, when the stock was trading around $39, a depressed price that reflected not-so-hot results in recent quarters. Osterweis thought the market was underestimating the value of several crucial Qualcomm patents, and it turns out, he was on to something. A revival in tech spending boosted the firm, and Osterweis sold the stock in January, when it was trading around $52, booking a cool 33 percent profit in less than a year. Again, the trigger pull was atypically quick, but he says such decisions are based on share prices. "If a stock goes up quickly, we'll sell it and move on to something else," he says.
The fund holds about 40 stocks, and one of the largest positions, can manufacturer Crown Holdings, has been in the fund for seven years, even though the stock has more than doubled (strong foreign sales will propel it even higher, Osterweis says). Morningstar analyst Dan Culloton says a concentrated portfolio of out-of-favor stocks can be more volatile than a broadly diversified fund. But, he says, Osterweis has done a good job cushioning the fund from shocks by holding some cash and bonds.
Much like the other low-turnover funds, the Osterweis fund has lagged during years when the market hums along. In 2006 and 2007, the fund not only trailed most of its peers, but also the S&P 500 index. But it has returned nearly 6 percent a year, on average, over the past decade, while the broader market has gone nowhere. Doug Kinsey, a partner at Artifex Financial Group in Oakwood, Ohio, says roughly 10 percent of the $55 million his firm manages for clients is invested in the Osterweis fund. Kinsey says he has more confidence in funds that rarely trade: "We want to work with managers who share our buy-and-hold philosophy."