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Objective
The fund seeks “maximum total return” through a combination of capital appreciation and income. The fund invests in undervalued securities, included (mostly domestic) high dividend large cap stocks, REITs, master limited partnerships, royalty trusts and convertibles. The manager invests in companies “that it understands well.” The managers also generate income by selling covered calls on some of their stocks.
Adviser
T2 Partners Management, LP. T2, named for founders Whitney Tilson and Glenn Tongue, manages about $150 million through its two mutual funds (the other is Tilson Focus TILFX) and three hedge funds (T2 Accredited, T2 Qualified and Tilson Offshore). These are Buffett-worshippers, in the Warren rather than Jimmy sense. The adviser was founded in 1998.
Manager
Zeke Ashton, founder, managing partner, and a portfolio manager of Centaur Capital Partners L.P., has managed the fund since inception. Mr. Ashton is the the Sub-Advisor. Before founding Centaur in 2002, he spent three years working for The Motley Fool where he developed and produced investing seminars, subscription investing newsletters and stock research reports in addition to writing online investing articles. He graduated from Austin College, a good liberal arts college, in 1995 with degrees in Economics and German.
Management’s Stake in the Fund
Somewhere between $100,000 and $500,000 as of October 2009.
Opening date
March 16, 2005
Minimum investment
$1,500 for regular and tax-advantaged accounts, reduced to $1000 for accounts with an automatic investing plan
Expense ratio
2.00% after waivers on an asset base of $40 million, plus a 2% redemption fee on shares held less than a year.
Comments
Tilson Dividend presents itself as an income-oriented fund. The argument for that orientation is simple: income stabilizes returns in bad times and adds to them in good. The manager imagines two sources of income: (1) dividends paid by the companies whose stock they own and (2) fees generated by selling covered calls on portfolio investments.
The core of the portfolio are a limited number (currently about 25) of high quality stocks. In bad markets, such stocks benefit from the dividend income – which helps support their share price – and from a sort of “flight to quality” effect, where investors prefer (and, to an extent, bid up) steady firms in preference to volatile ones. About three-quarters of those stocks are domestic, and one quarter represent developed foreign markets.
The manager also sells covered calls on a portion of the portfolio. At base, he’s offering to sell a stock to another investor at a guaranteed price. “If GM hits $40 a share within the next six months, we’ll sell it to you at that price.” Investors buying those options pay a small upfront price, which generates income for the fund. As long as the agreed-to price is approximately the manager’s estimate of fair value, the fund doesn’t lose much upside (since they’d sell anyway) and gains a bit of income. The profitability of that strategy depends on market conditions; in a calm market, the manager might place only 0.5% of his assets in covered calls but, in volatile markets, it might be ten times as much.
The fund currently generates a lot of income but the reported yield is low because the fund’s expenses are high, and covering operating expenses has the first call on income flow. While it has a high cash stake (about 20%), cash is not current generating appreciable income.
The fund’s conservative approach is succeeded (almost) brilliantly so far. At the fund’s five year anniversary (March 2010), Lipper ranked it as the best performing equity-income fund for the trailing three- and five-year periods. At that same point, Morningstar ranked it in the top 1% of mid-cap blend funds. It’s maintained that top percentile rank since then, with an annualized return of 9.3% from inception through late November 2010.
The fund has achieved those returns with remarkably muted volatility. Morningstar rates its risk as “low” (and returns “high”) and the fund’s five-year standard deviation (a measure of volatility) is 15, substantially below its peers score of 21.
And, on top of it all, the fund has substantially outperformed its more-famous stable-mate. Tilson Focus (TILFX), run by value investing guru Whitney Tilson, has turned a $10,000 investment at inception into $13,100 (good!). Tilson Dividend turned that same investment into $16,600 (better! Except for that whole “showing up the famous boss” issue).
Bottom Line
There are risks with any investment. In this case, one might be concerned that the manager has fine-tuned his investment discipline to allow in a greater number of non-income-producing investments. That said, the fund earned a LipperLeader designation for total returns, consistency and preservation of gains, and a five-star designation from Morningstar. For folks looking to maintain their stock exposure, but cautiously, this is an awfully compelling little fund.
Fund website
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