Fund name: Tilson Focus (TILFX)
Objective:
A non-diversified domestic equity fund which can hold both long and short
positions, and places a substantial fraction of its portfolio in derivatives.
Adviser: T2 Partners
Management, Ltd. T2 manages about $110
million for high-net-worth individuals through a variety of offshore and hedge
funds.
Manager: Whitney Tilson and Glenn Tongue.
Mr. Tilson is a certified celebrity in the
world of money managers. He is portrayed
as “a young curmudgeon” whose official biography notes that he manages a long
list of investment vehicles, wrote for The Motley Fool and TheStreet.com, teaches
financial analysis, co-founded the non-profit Initiative for a Competitive Inner
City and an investment fund targeting inner-city and minority-owned businesses,
was “a founding member” of Teach for America and the recipient – with High
Distinction – of an MBA from Harvard, his undergrad alma mater. Mr. Tongue had a distinguished career at UBS
and Donaldson,
Opening date:
Minimum investment: $2500 for both regular and tax-sheltered accounts; that minimum
drops to $1000 for investors willing to establish an automatic investment plan.
Expense ratio: 2.40% after an expense waiver; 6.67% without the
waiver. In addition, the fund has a
performance-based fee structure under which the investment advisory fee – the
managers’ cut – can vary from 1.05 to 1.95%, based on its performance relative
to the Wilshire 5000.
Comments: If you can imagine “Ariel Focus with Attitude,” you’ve
got a pretty good snapshot of Tilson Focus. Both funds are run by very bright citizens of
Graham and Doddsville. As a result, both sets of managers talk about
the same values: investing in companies and not just stocks, looking for good
management and economic moats, buying dollars for fifty cents, and holding on
until the rest of us realize that we want those stocks and bid up the prices.
At
that point, some serious differences emerge.
It appears that T2 seeks to mimic, so far as a mutual fund practically
can, one of their hedge funds. An
interview in ’05 refers to T2’s “incredible record,” articles in ’04 note that his
Tilson Growth Fund, LP returned 65% over 5 years
while the S&P500 had returned zero and that he beat the S&P in 2003’s
strong up market and (by 3:1) in 2004’s mixed one. In “the shadowy world of
hedge funds,” that might be about as complete as public disclosure is going to
get. Since his hedge fund reportedly
doesn’t rely on abstruse strategies for its success, Mr. Tilson
believes that he will be able to emulate its success in a mutual fund
portfolio. In particular he has
committed to matching the “long” positions in the mutual fund to long positions
in his other partnerships. Over its very
short life, the fund has consistently outpaced both the S&P500 and its
Morningstar peer group.
So what
differences flow from the experience of running a hedge fun?
1.
The mutual fund may be a lot more concentrated than normal “focus”
funds – the manager allows that he might hold as few as 12 names.
2.
The mutual fund has the mandate to short stocks and will use
options to manage volatility. His
3.
The fees will be higher – the expense ratio, after waivers,
is 2.40%. In part that’s because the
fund is tiny (under $10 million), but the advisory fee can run as high as 1.95%.
4.
There’s a hefty redemption fee – 2.00% for shares held less than
12 months. His first shareholder lettter (
5.
He’d prefer that you not look too frequently at fund
performance.
6.
He’d prefer that you not bother him – don’t write, don’t call,
and “don’t send an e-mail berating us or demanding an explanation” for “problem
stocks” in the portfolio.
Bottom line: Mr. Tilson seems to have a
strong track record and a good head. He’s
trying to align his interests with yours by investing heavily in the fund and
setting pretty high standards for his incentive fee. If you’re willing to risk considerable
volatility and pay substantially above-average fees, this offers an intriguing
option for aggressive value investors.
Company website: http://www.tilsonmutualfunds.com/index.html
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Assets: $13 million |
Expenses: 1.98% |
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YTD return: (17.3%)(as of 8/29/08) |
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Tilson is working through two absolutely disastrous years for this fund. In 2007 the fund lagged 99% of its "large core" peers and, through the first eight months of 2008 it is lagging 96% of them. It’s not entirely clear that the comparison is meaningful since the fund has occupied three different Morningstar style-boxes in three years, none of which were "large blend." Currently, they’re positioned at the border between small and midcap, blend and growth. The fund’s April 2008 semi-annual report addresses the concerns: We are disappointed and embarrassed by our Fund’s dismal performance over the past six months. That said, we are not surprised that we occasionally have to endure such unpleasant periods. In our effort to outperform the market over long periods of time, we manage a very concentrated portfolio – hence the word "Focus" in the Fund’s name – so over short periods of time, our results are likely to diverge materially from our benchmark, the Dow Jones Wilshire 5000 Composite Total Return Index (full cap). Sometimes this divergence is on the upside and sometimes – as in recent months – it’s on the downside. Our Fund’s recent performance highlights why so few people are true value investors: because it’s really hard, both intellectually and, especially during times like these, emotionally as well. The managers go on to counsel patience and fortitude. It would be easy to dismiss their words as self-serving pap, except that they went on to solidly outperform their peers over the following four months and to vastly outperform them during August’s tepid upturn. Oddly, Tilson’s other fund – Tilson Dividend (TILDX) – has done substantially better despite being even more focused than the Focus fund. |
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