Dear friends,
I had a chance to speak with David Rolfe of Wedgewood Partners and Morty Schaja, president of RiverPark Funds, tonight. A couple dozen listeners joined us, though most remained shy and quiet. Morty opened the call by noting the distinctiveness of RWGFX's performance profile: even given a couple quarters of low relative returns, it substantially leads its peers since inception. Most folks would expect a very concentrated fund to lead in up markets. It does, beating peers by about 10%. Few would expect it to lead in down markets, but it does: it's about 15% better in down markets than are its peers. Mr. Schaja is invested in the fund and plans on adding to his holdings in the week ahead.
Rolfe invests in 20 or so high-quality, high-growth firms. He has another 15-20 on his watchlist, a combination of great mid-caps that are a bit too small to invest in and great large caps a bit too pricey to invest in. It's a fairly low turnover strategy and his predilection is to let his winners run. He's deeply skeptical of the condition of the market as a whole - he sees badly stretched valuations and a sort of mania for high-dividend stocks - but he neither invests in the market as a whole nor are his investment decisions driven by the state of the market. He's sensitive to the state of individual stocks in the portfolio; he's sold down four or five holdings in the last several months nut has only added four or five in the past two years. Rather than putting the proceeds of the sales into cash, he's sort of rebalancing the portfolio by adding to the best-valued stocks he already owns.
For what interest it holds, that's Apple. He argues that analysts are assigning irrationally low values to Apple, somewhere between those appropriate to a firm that will never see real topline growth again and one that which see a permanent decline in its sales. He argues that Apple has been able to construct a customer ecosystem that makes it likely that the purchase of one iProduct to lead to the purchase of others. Once you've got an iPod, you get an iTunes account and an iTunes library which makes it unlikely that you'll switch to another brand of mp3 player and which increases the chance that you'll pick up an iPhone or iPad which seamlessly integrates the experiences you've already built up. As of the call, Apple was selling at $400. Their sum-of-the-parts valuation is somewhere in the $600-650 range.
Morningstar this evening is reporting a price per share of $4908 for Apple. If any of you own shares, I'd consider selling them at that price to Mr. Mansueto, Morningstar's founder. Heck, he's worth $1.6 billion - he can afford it.
In general, the companies in the fund's portfolio have been growing earnings noticeably more quickly than their share prices have risen, so the portfolio's P/E is actually dropping. He contrasted that to the high-dividend consumer products companies whose share price "has been one fire" while their earnings lag.
Finally, the strategy capacity is north of $10 billion and he's currently managing about $4 billion in this strategy (between the fund and private accounts). With a 20 stock portfolio, that implies a $500 million in each stock when he's at full capacity. The expense ratio is 1.25% and is not likely to decrease much, according to Mr. Schaja. He says that the fund's operations were subsidized until about six months ago and are just in the black now. He suggested that there might be 20 or so basis points of flexible room in the expenses. I'm not sure where to come down on the expense issue. No other managed, concentrated retail fund is substantially cheaper - Baron Partners and Edgewood Growth are 15-20 basis points more, Oakmark Select and CGM Focus are 15-20 basis points less while a bunch of BlackRock funds charge almost the same.
On whole, it strikes me as a remarkable strategy: simple, high return, low excitement, repeatable. I'm curious, as ever, about what reactions other folks had.
For what it's worth,
David
Comments
I agree with the manager on APPL. Even without jobs the company is generating a lot of free cash flow. $400 price is actually very good.
It has 55% in mid-cap and another 5% in small-cap.
"Once you've got an iPod, you get an iTunes account and an iTunes library which makes it unlikely that you'll switch to another brand of mp3 player and which increases the chance that you'll pick up an iPhone or iPad which seamlessly integrates the experiences you've already built up."
The statement above was true when Apple product was the only game in town. Not any more. Last Christmas, quiet a few friends of mine had switched to other vendors. One even told me he just would like to try something different from Apple as he had played Apple products for long time. Apple was once owned by over 6000 mutual funds. It now has big wave of unloading as the chemistry goes from growth to value. My friend told me his brother got call from a broker to recommend AAPL. An obvious sign of institution selling. It may come back to 600 but who knows how long it would take.
I can't help thinking of Peter Lynch's words upon AAPL's drop: "If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favourable publicity, the one that every investor hears about in the car pool or on the commuter train - and succumbing to the social pressure, often buys."
The "Featured Fund" tab will lead you to a special page for every fund on which we've hosted a conference call. Those pages include an mp3 version of the conference call, an audio-profile (also mp3) of the fund, an updated full profile, highlights of the call and links to fund information.
We'll post the RWGFX page on May 1. For now, Chorus Call is hosting the (downloadable) mp3 of the conference call: http://78449.choruscall.com/dataconf/productusers/mfo/media/mfo130417.mp3
Hope that helps,
David