2
Managers and analysts are capitalists, and they
greatly prefer a structure where they own a part of
their firm. Essentially this is a partnership structure
where key contributors buy in after a number of years
and sell when they leave. Kind of like a good mutual
fund, it’s an excellent structure for building long-term
wealth, but it doesn’t help you get rich quick.
Dodge
&
Cox has this structure, and so does Primecap,
and American funds comes close, though it doesn’t
have as strict rules on selling shares back. Montag
&
Caldwell and Longleaf both have that structure.
Holders of their funds know these firms won’t be
selling themselves, so they can feel comfortable
about owning these funds for the long run.
An OK Ownership Structure
Royce is owned by Legg Mason, but the firm main-
tains minority ownership and has tremendous
autonomy. This is an adequate setup, as it limits
meddling from above and provides some level
of ownership to managers and analysts. The deal
has been in place for a number of years with no
apparent problems with Legg Mason.
Still, it falls short of the setup above because both
ownership and control are limited. On the positive
side, it is owned by an asset manager, and that’s far
better than being owned by an insurer or a bank, as
many managers have told us over the years.
One Firm, One Strategy
After visiting giant fund companies that have nearly
every strategy under the sun, Montag and Longleaf
were refreshing changes. The firms really have only
one strategy each, and that strategy hasn’t changed
for
30
years. As Mason Hawkins of Longleaf said,
“We only want to hire someone who already appre-
ciates the power of buying a dollar for
50
cents.”
Longleaf is all about the compounding potential of
buying a company at a big discount to its worth.
It’s so important that it will let cash build in waiting
for the bargains to arrive and it will concentrate
holdings in a compact portfolio. Everyone at the firm
believes in this concept. Thus, while we can’t be
certain how well the next generation will execute
that strategy, we can be quite confident it will
stick with the strategy.
At Montag
&
Caldwell, the focus is on steady growth.
It wants companies that can sustain at least
10%
growth, and it wants to buy them for at least a
10%
discount to Montag’s estimate of their value. Thus,
you have a focused portfolio of high-quality stocks
like
Google
GOOG
and
Estee Lauder
EL
.
Each firm has had its ups and downs, but neither
wavers in the least on strategy. Returns are bumpy,
like most focused strategies, but you have tremen-
dous stability in management and strategy. I’ve dis-
cussed how investors hurt themselves by changing
strategies and shifting assets, and some portfolio
managers do a little of that, too, as they tweak their
strategies to address past failings only to find those
tweaks cost them money down the road.
At Royce, things are a bit more diffuse. Just about
everything is small-cap and value-oriented, but
there are quite a few flavors of that depending on
the managers. Analysts write reports on small
caps around the world to serve the managers, but
each manager follows a somewhat different strat-
egy. Charlie Dreifus favors cheaper and smaller
names than most at Royce, while Chuck Royce likes
a little higher-quality and tends to move around
the mid-cap border. Whitney George sprinkles in
some materials stocks, giving him a more cyclical
portfolio. Should one of them retire, their funds
might be a little different under the next manager.
However, Royce, like Longleaf and Montag, hews
to its strategies through thick and thin. As Chuck
Royce told me, Royce funds were largely in redemp-
tions throughout the
90
s and they didn’t waver.
Consistent Strategies, Bumpy Returns
Continued From Cover
