*On December 12, 2022, Green Owl Intrinsic Value Fund (GOWLX) and Marathon Value Portfolio (MVPFX)  were merged and converted into a new Kovitz Core Equity ETF (EQTY) along with over $500 million of assets from separately managed accounts. The ETF adopted the record and strategy of the Green Owl Fund. In consequence, the information for Marathon Value should be read for archival purposes only.*

Objective

To provide shareholders with long-term capital appreciation in a well-diversified portfolio.  They invest primarily in U.S. mid- to large caps, though the portfolio does offer some international exposure (about 10% in mid-2011) and some small company exposure (about 2%).   On average, 80% of the portfolio is in the stock market while the rest is in cash, short term bonds and other cash equivalents.  The manager looks to buy stocks that are “relatively undervalued,” though Morningstar generally describes the portfolio as a blend of styles.  The core of the portfolio is in “sound businesses [with] dedicated, talented leaders” though they “sometimes may invest opportunistically in companies that may lack one of these qualities.”  The portfolio contains about 80 stocks and turnover averages 30% per year.

Adviser

Spectrum Advisory Services, an Atlanta based investment counseling firm whose clients include high net worth individuals and pension and profit sharing plans.  In addition to advising this fund, Spectrum manages over $415 million in taxable, retirement and charitable accounts for high net worth individuals and institutions.

Manager

Marc S. Heilweil.  Mr. Heilweil is President of Spectrum.  He founded the firm in 1991 and has managed Marathon since early 2000.  He received both his B.A. and his J.D. from Yale.

Management’s Stake in the Fund

Mr. Heilweil has over $1 million invested, and is the fund’s largest shareholder.

Opening date

The original fund launched on March 12, 1998 but was reorganized and re-launched under new management in March 2000.

Minimum investment

$2,500 across the board.

Expense ratio

1.23% on assets of $41 million (as of 6/30/2011). Update – 1.25% on assets of nearly $42 million (as of 1/15/2012.)

Comments

It’s not hard to find funds with great returns.  Morningstar lists them daily, the few surviving financial magazines list them monthly and The Wall Street Journal lists them quarterly.  It’s considerably harder to find funds that will make a lot of money for you. The indisputable reality is that investors get greedy any time that the market hasn’t crashed in 12 months and are delusional about their ability to stick with a high-return investment.   Many funds with spectacular absolute returns have earned very little for their investors because the average investor shows up late (after the splendid three-year returns have been publicized) and leaves early (after the inevitable overshoot on the downside).

The challenge is to figure out what your portfolio needs to look like (that is, your mix of stocks, bonds and cash and how much you need to be adding) in order for you to have a good chance of achieving your goals, and then pick funds that will give you exposure to those assets without also giving you vertigo.

For investors who need core stock exposure, little-known Marathon Value offers a great vehicle to attempt to get there safely and in comfort.  The manager’s discipline is unremarkable.  He establishes a firm’s value by looking at management strength (determined by long-term success and the assessment of industry insiders) and fundamental profitability (based on a firm’s enduring competitive advantages, sometimes called its “economic moat”).  If a firm’s value exceeds, “by a material amount,” its current share price, the manager will look to buy.  He’ll generally buy common stock, but has the option to invest in a firm’s high-yield bonds (up to 10% of the portfolio) or preferred shares if those offer better value.   Occasionally he’ll buy a weaker firm whose share price is utterly irrational.

The fund’s April 2011 semi-annual report gives a sense of how the manager thinks about the stocks in his portfolio:

In addition to Campbell, we added substantially to our holdings of Colgate Palmolive in the period.  Concerns about profit margins drove it to a price where we felt risk was minimal. In the S&P 500, Colgate has the second highest percentage of its revenues overseas.  Colgate also is a highly profitable company with everyday products.  Colgate is insulated from private label competition, which makes up just 1% of the toothpaste market.  Together with Procter & Gamble and Glaxo Smithkline, our fund owns companies which sell over half the world’s toothpaste.  While we expect these consumer staples shares to increase in value, their defensive nature could also help the fund outperform in a down market.

Our holdings in the financial sector consist of what we consider the most careful insurance underwriters, Alleghany Corp., Berkshire Hathaway and White Mountain Insurance Group.  All three manage their investments with a value bias.  While Berkshire was purchased in the fund’s first year, we have not added to the position in the last five years.  One of our financials, U.S. Bancorp (+7%) is considered the most conservatively managed of the nation’s five largest banks.  The rest of our financial holdings are a mix of special situations.

There seems nothing special about the process, but the results place Marathon among the industry’s elite.  Remember: the goal isn’t sheer returns but strong returns with limited risk.  Based on those criteria, Marathon is about as good as a stock fund gets.  For “visual learners,” it’s useful to glance at a risk-return snapshot of domestic equity funds over the past three years.

Here’s how to read the chart: you want to be as close as possible to the upper-left corner (infinite returns, zero risk).  The closer you get, the better you’re being served by your manager.  Five funds define a line of ideal risk/return balance; those are the five dots in a row near the upper-left.  Who are they?  From lower return/lower risk, they are:

First Eagle US Value (FEVAX): five stars, $1.8 billion in assets, made famous by Jean-Marie Eveillard.

Marathon Value (MVPFX): five stars for the past three-, five- and ten-year periods, as well as since inception, but with exceedingly modest assets.

Sequoia (SEQUX): five stars, $4.4 billion in assets, made famous by Bill Ruane and Bob Goldfarb, closed to new investors for a quarter century.

Nicholas (NICSX): five stars for the past three years, $1.7 billion, low turnover, willing to hold cash, exceedingly cautious, with the same manager (Ab Nicholas) for 41 years.

Weitz Partners Value (WPVLX): five stars over the past three years, $710 million in assets, run by Wally Weitz for 28 years.

That’s a nice neighborhood, and the funds have striking similarities: a commitment to high quality investments, long-tenured managers, low turnover, and a willingness to hold cash when circumstances dictate.  Except for Marathon, they average $2 billion in assets.

Fans of data could search Morningstar’s database for domestic large cap stock funds that, like Marathon, have “low risk” but consistently better long-term returns than Marathon.  There are exactly three funds (of about 1300 possibles) that meet those criteria: the legendary Sequoia, Amana Income (AMANX) and Auxier Focus (AUXFX), both of which are also profiled as “stars in the shadows.”

Regardless of how you ask the question, you seem to get the same answer: over Mr. Heilweil’s decade with the fund, it has consistently taken on a fraction of the market’s volatility (its beta value is between 74 and 76 over the past 3 – 10 years and Morningstar calculates its “downside capture ratio” as 68%). Alan Conner from Spectrum reports that Marathon is the 11^th least volatile large core fund of near 1800 that Morningstar tracks. At the same time, it produces decent if not spectacular returns in rising markets (it captures about 82% of the gains in a rising market).  That combination lets it post returns in the top 10% of its peer group over the past 3 – 10 years.

Because Mr. Heilweil is in his mid 60s and the fund depends on his skills, potential investors might reasonably ask about his future.  Mr. Conner says that Heilweil intends to be managing the fund a decade from now.  The fund represents a limited piece of Heilweil’s workload, which decreases the risk that he’ll become bored or discouraged with it.

Bottom Line

If you accept the arguments that (a) market volatility will remain a serious concern and (b) high-quality firms remain the one undervalued corner of the market, then a fund with a long record of managing risk and investing in high-quality firms makes great sense.  Among funds that fit that description, few have compiled a stronger record than Marathon Value.

Fund website

Marathon Value Portfolio, though the website has limited and often outdated content.

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact David@MutualFundObserver.com.

*The fund has been liquidated.*

Objective and Strategy

Tocqueville Select Fund pursues long-term capital appreciation by investing in a focused group of primarily small and mid-sized U.S. stocks. The portfolio, as of 9/30/11, is at the high end of its target of 12 to 25 stocks.  The managers pursue a bottom-up value approach, with special delight in “special situations” (that is, companies left for dead by other investors).  The fund can hedge its market exposure, but cannot short.  It can invest in fixed-income instruments, but seems mostly to hold stocks and cash.   Cash holdings are substantial, often 10 – 30% of the portfolio.

Adviser

Tocqueville Asset Management, which “has been managing private fortunes for more than 30 years.”  They serve as advisor to six Tocqueville funds, including the two former Delafield funds. The Advisor has been in the public asset management business since 1990 and. as of January, 2011, had more than $10.8 billion in assets under management.

Managers

J. Dennis Delafield, Vincent Sellecchia, and Donald Wang.  Mr. Delafield founded Delafield Asset Management in 1980 which became affiliated with Reich & Tang Asset Management in 1991. He and his team joined Tocqueville in 2009.  Mr. Sellecchia worked with Delafield at Reich & Tang and Delafield.  He and Delafield have co-managed The Delafield Fund since 1993. Mr. Wang seems to be the junior partner (though likely a talented one), having served as an analyst on The Delafield Fund and with Lindner funds.  Mr. Sellechia was the first manager (1998) of the partnership on which this fund is based, Mr. Wang came on board in 2003 and Mr. Delafield in 2005.

Management’s Stake in the Fund

Messrs Delafield and Sellecchia have each invested between $100,000 – 500,000 in Select and over $1 million in Delafield.   As of last report, Mr. Wang hadn’t joined the party.  Half of the fund’s trustees (4 of 8) have investments in the fund.

Opening date

Good question!  Select is the mutual fund successor to a private partnership, the Reich & Tang Concentrated Portfolio L.P.  The partnership opened on July 31, 1998.  On September 28 2008, it became Delafield Select Fund (a series of Natixis Funds Trust II) and one year later, it became The Select Fund (a series of The Tocqueville Trust).  This is to say, it’s a 13-year-old portfolio with a three-year record.

Minimum investment

$1000 for regular accounts, $250 for IRAs

Expense ratio

1.4% on $102 million in assets.  Assets jumped from $60 million to $100 million in the months after Morningstar, in September 2011, released its first rating for the fund. There’s also a 2% redemption fee on shares held under 120 days.

Comments

Have you ever thought about how cool it would be if Will Danoff ran a small fund again, rather than the hauling around $80 billion in Contrafund assets?  Or if Joel Tillinghast were freed of the $33 billion that Low-Priced Stock carries?  In short, if you had a brilliant manager suddenly free to do bold things with manageable piles of cash?  If so, you grasp the argument for The Select Fund.

Tocqueville Select Fund is the down-sized, ramped-up version of The Delafield Fund (DEFIX).  The two funds have the same management team, the same discipline and portfolios with many similarities.  Both have very large cash stakes, about the same distribution of stocks by size and valuation, about the same international exposure, and so on.  Both value firms with good management teams and lots of free cash flow, but both make their money off “financially troubled” firms. The difference is that Select is (1) smaller, (2) more concentrated and (3) a bit more aggressive.

All of which is a very good thing for modestly aggressive equity investors.  Delafield is a great fund, which garners only a tiny fraction of the interest it warrants.  Morningstar analysis Michael Breen, in September 2010, compared Delafield to the best mid-cap value funds (Artisan, Perkins, Vanguard) and concluded that Delafield was decisively better.

Its 11.4% annual gain for the past decade is the best in its category by a wide margin, and its 15-year return is nearly as good. And a look at upside and downside capture ratios shows this fund is the only one in the group that greatly outperformed the Russell Mid Cap Value Index in up and down periods the past 10 years.

Delafield Select was ever better.  Over the ten years ending 12/29/2011, the Select Portfolio would have turned $10,000 into $27,800 returned 14.5% while an investment in its benchmark, the Russell 2000, would have grown to $17,200.  Note that 70% of that performance occurred as a limited partnership, though the partnership’s fees were adjusted to make the performance comparable to what Select might have charged over that period.

That strong performance, however, has continued since the fund’s launch.  $10,000 invested at the fund’s inception would now be worth $13,200; the benchmark return for the same period would be $11,100.

The fund has also substantially outperformed its $1.3 billion sibling Delafield Fund, both from the inception of the partnership and from inception of the mutual fund.

The red flag is volatility.  The fund has four distinctive characteristics which would make it challenging as a significant portion of your portfolio:

1. It’s very concentrated for a small cap fund, it might hold as few as a dozen stocks and even its high end (25-30 stocks) is very, very low.
2. It looks for companies which are in trouble but which the managers believe will right themselves.
3. It invests a lot in microcap stocks: about 30% at its last portfolio report.
4. It invests a lot in a few sectors: the portfolio is constructed company by company, so it’s possible for some sectors (materials, as of late 2011) to be overweighted by 600% while there’s no exposure at all to another six half sectors.

It’s not surprising that the fund is volatile: Morningstar ranks is as “above average” in risk.  What is surprising is that it’s not more volatile; by Morningstar’s measurement, its “downside capture” has been comparable to its average small-value peer while its upside has been substantially greater.

Bottom Line

This is not the only instance where a star manager converted a successful partnership into a mutual fund, and the process has not always been successful.   Baron Partners (BPTRX) started life as a private partnership and as the ramped-up version of Baron Growth (BGRFX), but has decisively trailed its milder sibling since its launch as a fund.  That said, the Delafield team seem to have successfully managed the transition and interest in the fund bounced in September 2011, when it earned its first Morningstar rating.  Investors drawn by the prospects of seeing what Delafield and company can do with a bit more freedom and only 5% of the assets might find this a compelling choice for a small slice of a diversified portfolio.

Fund website

Tocqueville Select Fund

Fact Sheet

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