Commentary 5/3/2011
Our approach to equity investing is straightforward. Equity investments are segmented into several distinct asset classes ranging from large growth stock to small value stocks to international stocks. Since very few asset managers can beat their benchmark indexes over an extended period of time, it is necessary to either have a system to find the best managers or simply use the indexes. Claiming that we could pick stocks ourselves in each of the equity asset classes would be very farfetched. Luckily for us, we don’t have to worry about who pays the highest commission for selling their fund or fund family. Since we are not paid commissions, we focus only on finding the best investments for our clients.
Our criteria for finding the best rely on a few ideas. We want the funds that do the best when things go bad. We want the managers who do more than just mirror the index. Index funds have very low expense ratios. If a manager is just following the index, there’s no reason to pay a higher expense ratio. We also look at a fund’s investment philosophy and how much of the managers’ own money is invested in the fund. You can usually trust a manager who has a solid investment philosophy and believes in it enough to put his or her own savings in it.
We found all of those things in the Adirondack Small Cap Fund (ADKSX). We started using the fund when it was just getting off the ground and before the fund became eligible for awards. Recently, Adirondack won a very prestigious Lipper Fund Award for Small Cap Value in the U.S. Over the past 3 years, including the Great Recession, they were #1 out 196 small cap value funds. You may have seen some articles about them. You can read Kerry Mayo’s published quote about the Adirondack fund at:
http://www.spotlightnews.com/news/view_news.php?news_id=1303495239
Awards, like Morningstar Star Ratings, should be taken with a grain of salt. It’s nice to see that funds that we use have won awards, but it’s not a determining factor in our selection process. In fact, several funds that we use, from companies including Scout, Franklin Templeton, Janus, First Eagle and Oakmark, all won 2011 Lipper Awards. The awards should be an affirmation that one is selecting the best funds, not a decision maker.
We single out ADKSX because the managers are local and bring significant, very successful experience at other funds to Adirondack. They built their business by sitting down with independent advisors instead of going to the big brokerages. They are also small, which is important when investing in small companies, and they have assured us that they will keep the fund at a manageable size of assets. This demonstrates their conviction in doing what is best for their investors, which confirms our faith in them and our equity selection process.
One should also be wary of mutual fund awards given to companies, or fund families, instead of to a specific fund. I can’t think of another use for these fund company or family awards than to create something for the fund company’s wholesalers to tout. What good does it do an investor to be invested in one company’s funds if they have a great large cap fund and a terrible bond fund? We haven’t come across a fund company that does everything well, and the fund company awards certainly don’t influence our selection process. Not only does it not matter to us that different fund companies do different things better, it makes sense. Investing in different asset classes requires different expertise. Outstanding performance by one fund in a family isn’t an indicator that another fund managed by the same company will do well.