Fund name:
Wasatch-1st Source Monogram Income Equity (FMIEX).Objective: The Income Equity Fund seeks capital appreciation with current income as a secondary objective. The Fund normally invests primarily in common stocks and securities convertible into common stocks of companies with market capitalization of at least $100 million which pay above average dividends or interest. The fund’s current yield is 1.5%, noticeably below that of the S&P 500.
Adviser: Currently it's 1st Source Corporation Investment Advisors, a wholly owned subsidiary of 1st Source Bank. They’ve been in business since the Great Depression and manage about $3 billion in assets. In early 2009, the adviser will be Wasatch Advisors of Salt Lake City, Utah. Wasatch has been around since 1975. It both advises the 14 Wasatch funds and manages money for high net worth individuals and institutions. Across the board, the strength of the company lies in its ability to invest profitably in smaller (micro- to mid-cap) companies. As of June 2007, the firm had $9.2 billion under management.
Manager: Ralph Shive. Mr. Shive is Vice President and Chief Investment Officer of 1st Source. He has been managing money since 1975 and joined 1st Source in 1989. Before that, he managed a private family portfolio in Dallas, Texas. Mr. Shive co-manages 1st Source Long/Short fund and oversees 35 separate accounts.
Management’s Stake in the Fund: under $10,000, which strikes me as truly regrettable.
Opening date: September 25, 1996.
Minimum investment: $1,000, which will increase to $2000 after the fund is acquired by Wasatch.
Expense ratio: 1.13%, which will be capped at 1.10% after the fund is acquired. The asset base is $635 million. The fund is authorized to charge a 12(b)1 fee but does not currently exercise that option.
Comments: Okay, okay, so you could argue that a $600-700 million dollar fund isn’t entirely "in the shadows." I’d argue that it’s pretty durn shadowy. At one level, the fund name "1st Source Monogram" sounds a lot like a bank mutual fund which sounds a lot like a fund with sales fees, high expenses and mediocre performance. None of which turns out to be true. At another level, the fact that Fidelity has 20 funds in the $10 billion-plus range all of which trail FMIEX – yes, that includes Contrafund, Low-Priced Stock, Magellan, Growth Company and all – argues strongly for the fact that Mr. Shive’s charge deserves substantially more investor interest than it has received.
As a matter of fact, pretty much everyone trails this fund. When I screened for funds with equal or better 1-, 3-, 5- and 10-year records, the only large cap fund on the list was Ken Heebner’s CGM Focus (CGMFX). Eight other funds made the cut. All but one (Fidelity Select Chemicals???) were small cap funds, and several of those were designed for institutional investors. In any case, a solid 6000 funds trail Mr. Shive’s mark and his top 1% returns for the past three-, five- and ten-year periods.
Why would that be the case? Good question. The public relations folks for Wasatch strike me as slightly loopy when, in announcing their acquisition of the 1st Source funds, they claimed, "The portfolio managers will follow the same innovative process in leading the Funds that they have used to build their highly regarded long-term track records." The problem is, I can’t find an "innovative process" here. Like the folks at Croft Value, Mr. Shive seems to thrive by being consistently thoughtful and careful rather than by applying some "secret sauce" (to use a catch phrase invoked by a regrettable number of managers with whom I’ve spoken).
About the closest Mr. Shive comes to an innovative approach is independence. He’s quoted in a characteristically thoughtful article by Rob Wherry as saying, "I like to remain flexible. I will use every tool I can." ("1st Source Fund Quietly Beats the Competition," Smartmoney.com, 7/17/08). That seem consistent with one of his investing maxims, "Let's do something intelligent with the money."
He has also expounded, for some time now, on the need to approach the market and investing carefully. In his parent company’s 2007 annual report, Mr. Shive described how he tries to serve his private clients:
First, we help clients develop a long-term performance mindset. Second, we’re very conscious about managing risk so we can focus on compounding positive returns. Finally, we avoid following fads and stay with plans that produce steady, long-term results.
In football, that’s referred-to as "blocking and tackling."
In March, Mr. Shive expressed his concern about the market and his desire to do well in bad times:
We are maintaining a cautious investment stance, based on our belief that more bad news is likely to emerge about the economy and the markets. We are concerned about the possible combination of economic stagnation and rising inflation—a difficult environment that the U.S. economy has not experienced since the 1970s. That said, we do believe that the economy has come through a good deal of the downturn, and we will continue to analyze data about economic conditions and individual companies in order to make the best investment decisions we can on our clients’ behalf.
The current climate underscores the importance of independent and flexible investment management. All of the Monogram Funds employ conservative but opportunistic investment strategies, and attempt to limit losses during market downturns while participating when the markets post gains.
As a result, Mr. Shive trimmed his exposure to commodity-related stocks after reaping considerable profit and concluding that the stocks were no longer reasonably priced. He also avoided investing in companies with exposure to the mortgage market and he frequently holds cash hoards of 15-20% of assets. His YTD 14.6% loss (through 9/30) is 7% ahead of his peer group, which lands him at the top of the heap yet again.
Bottom Line: in early 2009, this fund will morph quietly into Wasatch – 1st Source Income Equity Fund (FMIEX). That carries with it the risk that the fund will see unwieldy inflows, though its broad mandate and the extra research assistance that Wasatch promises should give the manager a fair amount of room to grow.
Wasatch has been pretty good stewards of their investors’ money and there’s no reason to believe that they won’t be equally careful here. Indeed, Wasatch is solicitous enough of Mr. Shive’s interests that they’ve agreed to open a South Bend, Indiana office to accommodate him. That said, investors anxious to take advantage of the lower current minimum investment and the prospect of some substantial tax-loss carryforward might want to consider acting sooner rather than later.
Fund website: 1st Source funds