Fund name
: FMC Strategic Value (no ticker)Objective: The fund focuses on "maximizing long term returns" by investing principally in common stocks of U.S. companies with small to medium market capitalizations (between $250 million and $5 billion) that the Adviser believes are selling at a market price below their true value and offer the potential to increase in value. The manager prefers to shop only where it has "a substantial understanding of the industry and the sector in which a company operates."
Adviser: First Manhattan Co (FMC). FMC specializes in providing professional investment management services primarily to individuals as well as partnerships, trusts, retirement accounts and institutional clients. They manage investments in securities for accounts that range from under $1 million to over $100 million. As of December 2006, they had about $15 billion under management. They’ve been in operation since 1964.
Manager: Edward Lefferman is a portfolio manager with over 30 years of investment research experience and holds a CFA charter. He joined First Manhattan Co. in 1984. In addition to managing this fund, Mr. Lefferman also manages a number of individual accounts for First Manhattan. For two decades before joining First Manhattan he worked at Lehman Brothers as an energy-stock analyst. Mr. Lefferman was the runner-up for Marketwatch’s 2006 Mutual Fund Manager of the Year award.
Management’s Stake in the Fund: Mr. Lefferman has invested between $500,000 and $1 million of his own money in this fund. In addition, he has invested a comparable amount in the large cap FMC Select fund. He does not manage FMC Select. The FMC funds are technically a series of the Advisers' Inner Circle (AIC) fund. AIC is a sort of mutual fund conglomerate which provides a variety of back-office services, including a pre-packaged Board of Directors, to bunches of little funds, each of which is designated as a series within AIC. One downside to the arrangement: none of the eight Directors of the FMC funds has invested a single dollar in them.
Opening date: August 14, 1998.
Minimum investment: $10,000 across the board. And they will take your money. The manager admitted earlier this year, "People are free to call First Manhattan and buy into the fund. But we don't promote it."
Expense ratio: 1.22% on assets of $261 million.
Comments: As is the case with many of the Stars in the Shadows, this mutual fund started out as a "friends and family" operation. It was designed to offer FMC’s investment expertise to folks who were connected with FMC or its clients, but who could not meet the firm's $200,000 investment minimum. They’ve quietly succeeded in consistently making money for those folks, without any interest in attracting attention. One simple measure of their reticence is the fact that the fund, nearly ten years old with a quarter billion in assets, still doesn’t have a ticker symbol.
Researching the fund is a bit of a challenge. There are certainly no marketing materials and FMC is not particularly interested in giving interviews. The annual and semi-annual reports are brief and focus, almost exclusively, on the prospects of a half dozen portfolio investments. Working together, Roy and I finally managed to find the fund's Statement of Additional Information online, but it wasn't easy.
That having been said, here’s what we can say with considerable confidence:
FMC describes their stock selection strategy this way: "In making equity investments, our investment managers use a generally risk-averse, value oriented approach. We seek out companies with good businesses, proven profitability, strong balance sheets, a consistent record, conservative accounting, and managements that are devoted to increasing values for their shareholders."
Mr. Lefferman is quoted in a story by Jonathan Burton as saying "We're out-of-favor investors. If we got interested in a company and saw five or six 'buy' recommendations on Wall Street, the chances are slim to none that we'd buy that company." The current portfolio is very compact: just 37 names. Their smallest position occupies 1.4% of the portfolio and the largest takes up 5.9%.
The fund has posted gains every year since inception. Over the past 5 years it has made 19.6% per year. Their annual return since inception through early 2007 (date of the last prospectus) has been 16.7%. As of Sept 29th, 2007, they’ve beaten their Morningstar peer group for the trailing day, week, month, quarter, three quarters (i.e., YTD), year and three years. They about match their peers over the preceding five year period. That’s because they had poor relative performance during the 2003 rebound (92nd percentile) while posting excellent absolute returns that year (29.3%).
The only oddity is the fund’s return in 2002. Morningstar reports that they made 2% that year while the S&P500 lost around 20%. That’s also what FMC reports on page 4 of the prospectus (1.96%) but in the Financial Highlights on page 11 they claim a total return of 8.57%. And simple division of the year’s starting an ending NAVs -- $12.19 and $12.51 respectively – shows a return of 2.62%. Odd, but still a net positive in any case.
As I noted, they’ve never had a year in the red. Morningstar rates it as having consistently "low" to "below average" risk and the fund shows only about three-quarters of the volatility of its "best fit" index. Currently the fund is holding about 25% cash. That cautiousness is also reflected in the fund’s excellent tax efficiency, which results from taking your time about choosing an investment and then holding it for the long term. The fund’s portfolio turnover ranges from 3 – 18%, especially low for a fund focusing on smaller firms.
Bottom Line: This fund seems to be the anti-thesis of "flashy." But if you can look past that weakness and are interested in a small to midcap fund that offers its investors strong, consistent returns with minimal volatility, reasonable expenses and good tax efficiency, you may be happy here.
Fund website: First Manhattan. Perhaps in support of their "we don’t really want your money" philosophy, there does not appear to be an investment application on FMC’s website. For that you’ll need to call the transfer agent: 1-877-FMC-4099 (877-362-4099).