Active managers are suffering. In recent years, actively managed funds have failed to beat appropriate indices at an
even greater clip than their usually high failure rate. Even those considered the best value managers have struggled
in a market that seems to move in only one direction – up.
Cautious value managers will invariably underperform a market that has gained 159% from the beginning of 2009
through 2014 (using the S&P 500 TR Index). But the magnitude of the market’s gain and the gap in
performance between historically good value funds and the market warrants a deeper examination at a moment when it’s
tempting to write off active management and even the most venerable value funds.
While these well-known value funds have been poor performers lately, their long-term records remain excellent. Their
cash positions have, in part, caused their recent underperformance, but cash has also fueled their longer-term
outperformance.
Below is a table indicating the funds’ current cash level, five-year return, 15-year return and Morningstar
category rank for 15 years. (All fund and index data from Morningstar)
| Fund |
Ticker |
Current
cash
level |
5-Yr
Return |
15-Yr
Return |
15-yr
Standard
deviation |
Morningstar
15-yr
category
rank |
| FPA Crescent |
FPACX |
38% |
11.04 |
10.99 |
10.6 |
1 |
| Yacktman Focused |
YAFFX |
17% |
13.29 |
12.75 |
15.06 |
1 |
| Sequoia |
SEQUX |
13% |
18.02 |
10.31 |
12.24 |
1 |
| First Eagle Global |
SGENX |
18% |
10.24 |
11.34 |
10.71 |
2 |
| Tweedy Browne Value |
TWEBX |
13% |
10.96 |
5.9 |
11.6 |
23 |
| Tweedy Browne Gobal Value |
TBGVX |
23% |
10.58 |
6.88 |
12.16 |
4 |
| Franklin Mutual Global Discovery |
TEDIX |
8% |
11.71 |
8.66 |
10.58 |
3 |
| |
| Average |
19% |
12.26 |
9.55 |
11.85 |
|
| |
| S&P 500 TR |
17.59 |
4.41 |
15.05 |
|
| MSCI ACWI |
11.93 |
3.63 |
16.13 |
|
| Data as of 6/30/2015 |
Short-term laggards
None of the funds, except for Sequoia with its 18.02% return, matched the S&P 500 Index’s 17.59%
annualized return for the five-year period ending in June 2015. In fact, most have trailed significantly.
All the funds, including Sequoia, have averaged over 12% annualized return for the five-year period, representing
350 basis points of annualized underperformance relative to the S&P 500.
While the returns for Sequoia and Yacktman Focused exceeded the MSCI ACWI index for the five-year period, those are
predominantly domestic funds, making the comparison less than optimal. The funds whose best fit index is the MSCI
ACWI are First Eagle Global, Tweedy Browne Global Value and Mutual Discovery; all of those funds trailed the 11.93%
annualized return of the world index, with 10.24% and 10.58%, and 11.71% annualized returns, respectively.
One might look at these funds with their cash positions and declare them utter failures for not having exceeded
their indices over the past half-decade. Perhaps their managers, psychologically scarred by the financial crisis,
never mustered the nerve to put more cash to work as the Federal Reserve kept interest rates firmly on the ground.
Long-term winners
Consider, instead, that their managers are not scarred and are assessing value properly.
After all, the 15-yr performance numbers tells a vastly different story. For that time period, all the funds beat
both indices. The worst performing fund for that period, Tweedy Browne Value, posted a 5.90% annualized return,
beating both indices 4.41% and 3.63% annualized returns meaningfully.
The 15-year average for the funds was 9.55%, representing an utter thrashing of both indices, neither of which
mustered a 5% annualized return.
Moreover, all the funds except one beat the indices with lower standard deviation. While the S&P 500 posted a
standard deviation of 15.05 for the period, the most volatile fund, Yacktman Focused, posted a 15.06 standard
deviation. Among the other funds, the highest standard deviation was 12.24 for the Sequoia fund.
And because standard deviation doesn’t discriminate between upside deviation from the mean and downside
deviation from the mean, Yacktman’s minuscule diference in standard deviation from that of the index may be
due to its massive outperformance. Standard deviation aside, the Yacktman Focused fund provided a better investor
experience from this crucial perspective; in 2008, the fund dropped less than 24%, while the S&P 500 Index
dropped 37%.
None of the funds dropped as much as their best fit indices during that year. FPA Crescent and First Eagle Global,
along with Yacktman Focused, all dropped less than 25%. Sequoia dropped 27.03%, nearly 1000 basis points less than
the index. Mutual Discover dropped 26.73%, though that was under a different manager perhaps more inclined to hold
cash than the current one.
Mutual Discovery has gone through manager changes over the years since Michael Price sold its parent, Mutual Series,
to Franklin Templeton in 1996. Nonetheless -- despite different views on cash -- its managers all trained under
Price or his analysts and have all been dedicated to the shop’s hallmark approach for cheap stocks, distressed
debt and merger arbitrage.
Altogether, for the 15-year period, these funds produced better returns than their best fit indices and did so with
smoother rides. In the process, they gave the lie to academic finance, which asserts that better performance must
come with higher volatility.
A balanced index might be the best fit for FPA Crescent, and indeed Morningstar categorizes it as a “moderate
allocation” fund. But the fund aims to produce equity-like returns, so I’m judging it against the S&P
500 Index in this piece.
The benefits of style drift
Besides having derived benefits from holding cash, two of the funds – FPA Crescent and Yacktman
Focused – went through meaningful and beneficial style drifts over the 15-year period. Both owned more
small-cap and mid-cap stocks 15 years ago, and have moved toward large- and mega-cap stocks now as a function of
where their managers and analyst teams are finding values. In retrospect, those were exactly the right moves. Large-
and mega-caps were expensive 15 years ago, and that situation has slowly reversed.
Finally, although items like this aren’t often considered formal “analysis” by professional
consultants and fund selectors, FPA Crescent and Yacktman nearly didn’t survive the late 1990s for the
portfolio choices their managers made. FPA Crescent was so severely punished by its investors for hunkering down in
small-caps and cash in the late 1990s – a move that turned out to be prescient -- that it lost 90% of its
investors by 2000. It had posted a cumulative 5% loss from 1998 through 1999 when the S&P 500 surged 55% for
that two-year period, but wound up being perfectly positioned for the aftermath of the technology bubble.
Additionally Don Yacktman’s board sued him for violating his fund’s charter. In reality he refused to
own the popular technology stocks of the day and many other large-cap stocks. He wound up winning the case and
posting excellent returns for the next decade and a half.
Advisors, analysts and consultants will have to decide if studying “factor loads” in a formal way is
more informative about a manager and his or her style than simply eyeballing portfolios at different points in time
and being sensitive to events such as investor defection and lawsuits. Managers like to say, “I’d rather
lose half my clients than lose half my clients assets.” Steven Romick of FPA Crescent and Don Yacktman faced
that challenge during the late 1990s in a way that tells you more about them as managers than factor load analysis
might.
Conclusion
An additional word about my sample of funds is in order. It was decidedly unscientific. I didn’t run any
special screens. I picked funds that everyone with experience in the industry knows to be respected value funds.
There are other well-known value funds I could have chosen, such as some of the Oakmark funds, which would have also
acquitted themselves well in a 15-year performance derby.
I opted for funds that are known to hold some cash. Tweedy Browne will never hold the amount of cash that FPA
Crescent or First Eagle does at times, but they hold some.
Charles de Vaulx, now manager of the IVA funds, was responsible for some of First Eagle’s performance. The IVA
funds don’t have 15-year records yet, so I excluded them. Assuming their records warrant it, they would be
candidates for a list like this when they reach the 15-year mark.
Despite my sample being unscientific, the long-term track record of these value funds and their managers’
judicious use of cash should allay investors’ fears about the funds’ recent performance and current
market valuations. These funds have been short-term laggards, but they’ve been in this position before and
wound up ahead in the end.
It won’t shock me if that happens again.
John Coumarianos is a freelance writer. He has worked as a branch representative at Fidelity Investments, a
mutual fund and equity analyst at Morningstar and a writer at Capital Group. He also runs the website/blog
Institutional Imperative. He owns two of the funds in his personal accounts and in those he manages for
others – FPA Crescent and Yacktman Focused, though, sadly, neither of them for the entire 15-yr
period.
Read more articles by John Coumarianos
