Fund name: Northern Multi-manager Mid Cap (NMMCX)
Objective: The fund seeks long-term capital appreciation through a diversified portfolio of primarily mid-cap securities. Mid-cap currently means between about $2 – 16 billion. Income is "incidental." The portfolio is split between three independent, outside managers.
Adviser: Northern Trust. The parent company was founded in 1889 and has about $650 billion in assets under management and several trillion more in deposits. Northern Trust Global Advisors has been managing money for institutional investors for about a quarter century.
Manager: Andrew Smith, Senior Vice President and Chief Investment Officer for NTGA since 2000. Before that, he managed about a billion dollars in asset allocation funds for Spectrum Investments. Smith’s task here is primarily to select and monitor the fund’s sub-advisers. The sub-advisers are:
Geneva Capital Management Ltd. – a Wisconsin-based firm with about $1.2 billion under management, mostly for institutions and high net-worth individuals. They focus on high quality companies. Northern describes them as having a "[c]onservative growth style: expected to protect capital during difficult growth markets." Geneva runs one other mutual fund, North Track Geneva Growth, which carries a sales load. Morningstar praises the fund for low turnover (20%), "[l]ong-term returns . . . among the best in the category," and "well below average" volatility.
LSV Asset Management – a Chicago-based adviser with about $74 billion under management for 400 institutions and high net-worth clients worldwide. These folks follow a "[t]raditional value style: quantitative approach. Systematically exploits judgmental biases and behavioral weaknesses influencing investors." LSV, the most-impressive of the managers, holds the largest slice of the portfolio at about 50%.
TCW Investment Management – a California firm which oversees about $130 billion, including the TCW funds. Aggressive growth style, with higher beta and volatility than other managers. TCW, the least-impressive of the managers, also holds the smallest slice of the portfolio at about 20%.
Inception: June 22, 2006.
Minimum investment: $2,500 for regular accounts, $500 for IRAs and $250 with an automatic investment plan.
Expense ratio: 1.20% after waivers on assets of $300 million, although only 1.30% even without the waivers.
Comments: The argument for Northern’s various multi-manager funds is pretty straightforward. Northern has been selecting investment managers for really rich people for 125 years. They’ve done it well-enough that Northern has been entrusted with assets that are starting to creep up on the trillion dollar mark. They sorted through hundreds of managers before selecting these three.
The most intriguing option presented by the Multi-manager Mid Cap fund is LSV Asset Management. LSV is run by a bunch of famous guys with PhDs, including Josef Lakonishok of the University of Illinois (and, formerly, Cornell), Andrei Shleifer of Harvard, and Robert Vishny of the University of Chicago. Collectively, they have better than a two hundred peer-reviewed research publications (easily accessible for the geeks among us at http://www.lsvasset.com/jsps/research/) and a slew of awards for their research and teaching. They have two particular areas of expertise: investor idiocy and quantitative analysis. Their argument is that investors make predictable errors and sufficiently dispassionate quant-driven investing allows for the systematic exploitation of those errors. Here’s their description of their investment process (which refers to their institutional, rather than mutual fund, work):
The fundamental premise on which our investment philosophy is based is that superior long-term results can be achieved by systematically exploiting the judgmental biases and behavioral weaknesses that influence the decisions of many investors. These include: the tendency to extrapolate the past too far into the future, to wrongly equate a good company with a good investment irrespective of price, to ignore statistical evidence and to develop a "mindset" about a company.
LSV uses a strictly quantitative investment model to choose out-of-favor (undervalued) stocks in the marketplace at the time of purchase and have potential for near-term appreciation. LSV believes that these out-of-favor securities will produce superior future returns if their future growth exceeds the market's low expectations.
Skeptics might argue "all this academic big-brain stuff would be nice if we lived in Theory but we don’t, so welcome to the real world." Skeptics would be miserably wrong. There are three routes for accessing LSV’s work. One is through their mutual fund, LSV Value Equity (LSVEX). The fund has been around since 1999 and has beaten its peer group every year. Not just by a little but often by 4% per year. In its worst year (2000), it was merely above average for the large-value group. In each of the past five years it’s had a top decile performance and its five-year rank is in the top 3% of its peer group. Unfortunately, the fund is closed and LSV sub-advises no other funds. The second avenue is through its accounts for high net-worth investors and institutions. It has eleven distinct strategies for the ultra-rich. Unfortunately, nine of those 11 are also closed to new investors so nyaah-nyaah to the rich people, too.
The third route is through the funds sub-advised by LSV. Only two such funds are available to retail, no-load investors. One is the Harbor Mid-cap Value Fund (HIMVX), for which LSV has been the sole sub-advisor since late 2004. The other is Northern Multi-Manager Mid Cap. Harbor offers a pure-play on LSV’s expertise. Northern offers a broader mid-cap fund by adding exposure to two additional sets of investing styles offered by the other institutional sub-advisors.
The first of the two, Geneva Capital Management, have a story similar to LSV’s, though one that lacks the academic pedigree. They provide GARP-y investment options to rich folks and through one load-bearing mutual fund. The management team is stable and highly experienced. Their strategy is unexceptional, their execution of it is excellent, their returns are strong and they tend to beat their peers in about three out of four years. They have a low-turnover style; they’re price-conscious about buying but not about selling. That is, they’re willing to let stocks in their portfolio run up well beyond their "fair value" as long as the underlying company and its management remain impressive.
TCW, admittedly, is a mixed bag. They’re looking pretty punky across the board right now but they’re not abysmal and they manage the smallest slice of the portfolio.
Bottom line: As with Northern’s other multi-manager funds (International and Small Cap), this is a calculated bet on Northern’s ability to assemble a group of superior investors whose services are not generally available. Mr. Smith has been doing this for better than 20 years and Northern has been doing it, to the apparent satisfaction of "a well-heeled clientele" for better than a century. If only for the opportunity to access the LSV process, it deserves consideration. Given Northern’s excellence at asset gathering, it might be worth consideration sooner rather than later.
Company link: http://www.northernfunds.com/ . For folks interested in pursuing the pure-play, check out the Harbor fund at http://www.harborfunds.com.