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The Best Money Manager You’ve Never Heard Of

By Mark W. Gaffney

Who is the greatest money manager in the U.S.?  Appaloosa’s David Tepper might come to mind. Or Seth Klarman of Baupost Group.  Maybe David Einhorn of Greenlight Capital. Then there’s Woody and Chris Towle of Towle & Co.

Wait, you’re probably asking, Woody and Chris who? If you’re like most investors, you’ve probably never heard of the father-son investment team of J. Elwood (Woody) Towle and Chris Towle.

However, according to an analysis using, Woody and Chris Towle head the top performing management firm in the U.S. over the last five years — Towle & Co.

I came to this conclusion by analyzing 13F filings. Form 13F is a filing that all institutional investors who manage over $100 million in assets must submit to the SEC no later than 45 days after the end of every quarter. The 13F is essentially a list of holdings that large investors own.

13Fs are publicly available, however WhaleWisdom maintains a database of the filings going back to 2001 and its software allows for detailed performance analysis and backtesting.

I compared the equal-weighted returns of all investment funds’ top ten holdings — rebalanced quarterly with each new 13F — over the last five years. Essentially I answered the question: What if over the last five years, I invested equal dollar amounts in each of a fund’s top ten positions, then updated that portfolio quarterly? Using WhaleWisdom, I then compared the hypothetical 13F portfolio returns of the 4200+ funds in its database.

Over the last five years, “cloning” Towle & Co.’s top ten 13F positions would have resulted in gains of 250.56%. That was the top performing firm, according to this analysis. One year hypothetical returns were an impressive 73.06%. The firm’s long-term 13F equal-weighted performance is also stellar — over 615% since the 4th quarter of 2003.

For this performance comparison, I narrowed the universe of investment firms by focusing on managers with low portfolio turnover. For reasons I’ll discuss below, investment firms that short stocks or do short-term trading are not great candidates for 13F analysis. So I limited the backtest to firms with average portfolio turnover of less than 25%. (Turnover is calculated by taking the number of new holdings + the number of positions closed out, divided by the total number of holdings for the quarter.)

Below is a chart showing Towle & Co.’s 13F performance (light green) vs the S&P 500’s total return (dark green) over the last five years.

13F analysis offers an excellent way to profit from the research of the greatest investors in the world by “cloning” their portfolios.  This is a strategy for achieving the returns of top managers without paying performance-eroding management fees. Also, by studying the highest-conviction holdings of leading funds, investors can discover stock ideas they may wish to overweight in their own portfolios.

However, 13F analysis does have its shortcomings:

  • Fund managers are only required to report long positions in 13Fs. Futures, currencies and short positions are not reported. For some funds, being long and short is a big part of their performance edge. By only seeing the long positions, one may not assessing the true performance of a manager’s portfolio. Therefore, funds with high-turnover portfolios and short-term strategies are poor candidates for cloning.
  • Funds have until 45 days after the end of a quarter to disclose that quarter’s holdings — its conceivable that an investor is mimicking a position taken by a manager nearly135 days ago. So it’s possible that investors cloning 13Fs are working off of stale information.

Though many investment fund styles do not lend themselves to 13F portfolio cloning, one strategy is ideal for 13F analysis — Value Investing. Value investors typically don’t short stocks and tend to hold positions for many quarters, patiently waiting for undervalued companies to be more accurately valued by the market. So investors who clone a value fund via 13Fs are likely to replicate that manager’s actual portfolio.

Towle and Co.’s specialty is “deep value” investing. From the company’s website:

Towle & Co. executes a fundamental, bottom-up, value discipline that emphasizes the purchase of companies believed to be significantly undervalued relative to their private market worth…While our deep value approach may include large capitalization stocks, the search for absolute value usually leads to equities with market capitalizations under $5.0 billion, an area commonly referred to as small-cap. Our years of experience and historical evidence indicate that companies with the highest rate of appreciation potential are most often smaller companies.

A look at Towle & Co.’s most recent 13F shows that the firm holds many stocks not typically in the portfolios of big money managers. Star managers may have built their reputations running small funds, but now they are forced to focus on larger cap stocks due to liquidity factors. Towle remains a relatively small money manager with about $800 million under management.


Stock Symbol Shares Held – 03/31/2017 Market Value – 03/31/2017 % of Portfolio Previous % of Portfolio Ranking Change in shares % Change Qtr first owned
Trinseo Sa TSE 827,192 55,505,000 6.40 5.70 1 109,690 15.2878 Q4 2014
Skywest Inc SKYW 1,593,239 54,568,000 6.29 6.67 2 226,930 16.609 Q3 2014
Meritor Inc MTOR 2,983,810 51,113,000 5.89 4.28 3 411,840 16.0126 Q3 2011
Huntsman Corp HUN 1,720,022 42,209,000 4.87 3.71 4 269,940 18.6155 Q1 2016
Tutor Perini corp. TPC 1,181,995 37,587,000 4.33 3.83 5 160,140 15.6715 Q3 2015
Goodyear Tire GT 1,010,053 36,362,000 4.19 3.62 6 134,720 15.3907 Q3 2008
Atlas Air Worldwide AAWW 642,061 35,602,000 4.10 3.89 7 85,570 15.3767 Q2 2013
Adient Plc ADNT 474,180 34,459,000 3.97 2.20 8 193,930 69.1989 Q4 2016
Flextronics Int’l FLEX 1,917,895 32,221,000 3.71 3.16 9 274,800 16.7245 Q4 2012
Fiat Chrysler Au FCAU 2,887,660 31,562,000 3.64 3.02 10 414,210 16.7462 Q3 2016

For investors not constricted by liquidity, smaller, more thinly-traded companies offer superior opportunities. Granted, small-cap investing does come with some increased risk, but for those who don’t mind adding some volatility to achieve stellar returns, Towle & Co.’s 13F filings have been a treasure trove of great ideas.

I should note that if you have a million dollars to invest, you can have Towle & Co. manage your account directly. Also, a simple way to benefit from the management prowess of Towle & Co. is via the company’s mutual fund — the Towle Deep Value Fund (TDVFX). Established in 2011, the mutual fund’s portfolio is a virtual mirror image of Towle’s 13F holdings. Over the last five years TDVFX had a total return of 122.86% — this earned the fund a five-star rating from Morningstar. Meanwhile the hypothetical 13F clone portfolio return was 250.56%. The difference? For one thing, the mutual fund charges a 1.2% management fee which the cloned portfolio avoids, so that’s a small factor.

Also, the equal-weighted 13F portfolio focused on Towle & Co.’s top-ten largest holdings as a % of its portfolio. Presumably the largest positions are a manager’s highest conviction positions. It appears that concentrating on Towle’s top ten picks has been a return-enhancing approach.

For many investors, a 1.2% management fee is a very reasonable price to pay for the world-class stock-picking abilities of Towle & Co. Especially when you consider many hedge funds charge a 2% annual management fee in addition to a 20% performance fee, but don’t achieve a fraction of Towle’s returns.

But for active investors interested in creating a portfolio of exceptional investment ideas, studying the 13F filings of Towle & Co. — and other obscure investment managers – is a way to significantly enhance returns.  Studying the portfolios of the greatest managers you’ve never heard of may be very profitable.


By Mark W. Gaffney

Legal marijuana may be the fastest growing industry since the dot com craze of the late 1990s, so it’s no surprise that the first marijuana ETF saw a burst of buying by cannabis investors eager to profit from the boom.

The Horizons Medical Marijuana Life Sciences ETF (HMMJ) began trading at CAD$10 on the Toronto Stock Exchange on April 5. First day volume was over 3 million shares, and buyers pushed the shares as high as CAD$11.84 by April 11.

While retail traders piled into the medical marijuana ETF, another group of investors appears to be far less sanguine – large U.S. money managers. If the stock holdings of hedge funds and other institutional investors are any indication, few marijuana-related stocks are worth owning.

13F filings as of year-end show U.S. investment funds are underwhelmed with the prospects for North American publicly traded cannabis stocks. An analysis of fund managers’ holdings using shows that as of year-end, large fund managers had significant positions in only four of the 14 stocks in the HMMJ portfolio. (Green shaded rows on left).

U.S. funds with over $100 million in assets are required to report their public holdings in U.S. stocks quarterly via 13F filings. Analyzing 13F transactions allows investors to “pull back the curtain” on the secretive transactions of hedge funds and other large money managers.

An analysis of the universe of publicly traded marijuana-related equities (table on left) finds that only eight stocks had 13F positions valued at greater than $5 million.

Essentially, U.S. fund managers — who spend hundreds of millions annually researching the best investments in the world – see better places to invest than the current crop of marijuana stocks.

In should be noted that 13Fs reflect only U.S. funds’ holdings of U.S. stocks, options and ADRs. Canadian and other foreign stocks may be disclosed in 13Fs, but are not required to be by the SEC. Also, the portfolios of Canada-based fund managers are not reflected in 13F filings.

According to ArcView research, legal cannabis sales are expected to grow from 5 billion in 2016 to over $20 billion in 2020 with a projected compound annual growth rate of nearly 30% for the next few years.

The growth in legal marijuana recalls other booming industries from recent years – cable television in the 90s, broadband internet and craft beer in the 2000s.

However, there is one major difference between the cannabis business and those industries: The use of marijuana is illegal under U.S. federal law. Like heroin and LSD — drugs deemed to have “no currently accepted medical use” — marijuana has been classified as a schedule 1 drug since 1970. While the significance of marijuana’s schedule 1 status has blurred due to state legalizations, federal laws on the books still make possession of pot punishable by large fines and jail time. Regulatory risk remains high for marijuana businesses and investors.

But twenty-six states now allow the use of marijuana for medicinal purposes and eight states have legalized recreational use of the drug. Canada is considering legislation to legalize pot country-wide.

Industry analysts expect more U.S. states to legalize medical and recreational pot, so even without federal legalization, legal marijuana revenues are expected to grow steadily in the years ahead.

But that doesn’t mean today’s cannabis stocks will profit from the boom. Public companies in the marijuana business are the definition of risky. Most shares trade over the counter and do not have to file audited financial reports with regulators.


Source: New Frontier Data, graphic by the Cannabist

Penny stocks are notorious for “pump and dump” schemes whereby con artists buy cheap shares, hype fraudulent stories, then sell their shares as the stock price spikes, leaving shareholders with nothing. Revenues from the legal cannabis industry could soar in the years ahead while investors in individual pot stocks lose all their money.

According to Morgan Paxhia, a managing director of San Francisco-based Poseidon Asset Management, “More than 90% of public domain marijuana-related stocks are very suspect.  Most are scams, just involved in taking investors’ money.”

Founded in 2013, Poseidon is one of the first hedge funds established to invest exclusively in the cannabis industry. Even though Paxhia follows cannabis companies closely and sits on the board of one small marijuana company, he’s not currently buying the publicly traded stocks. Paxhia believes it’s “just too early for a marijuana ETF, but the underwriter of the ETF was intent on being first to market with the idea.”

He opposes the inclusion of the controversial company Insys (Nasdaq: INSY) in Horizon’s marijuana ETF. According to Paxhia, Insys spent $500,000 of its own money lobbying against legal marijuana in Arizona. The bill to legalize recreational marijuana in that state was ultimately defeated.

Insys is developing a pharmaceutical version of THC, the main psychoactive ingredient in cannabis. If approved for use, the drug could compete against legal marijuana. Despite the controversy, Insys does have a significant institutional following. Insys’ 13F shareholders can be viewed here.

“More than 90% of public domain marijuana-related stocks are very suspect.  Most are scams, just involved in taking investors’ money.”

Morgan Paxhia, managing director of cannabis-focused Poseidon Asset Management

Paxhia is also troubled by the “havoc” HMMJ is creating in the low-priced names in its portfolio. As funds flow into the ETF for investment, HMMJ managers must buy shares in the underlying stocks to replicate the North American Medical Marijuana Index it tracks. Likewise, when the inevitable selling comes, the fund must liquidate the underlying shares. The small stocks do not have the liquidity to absorb large volume, and their prices can get wildly volatile.

At some point down the road, when the cannabis industry is more established, there may be publicly traded stocks that are proxies for the sector – much like Craft Brewery Alliance (BREW) or Boston Beer (SAM) are for the craft beer industry. But most of the current bunch of pot penny stocks likely won’t be around long enough to see a more mature marijuana industry.

A good idea for anyone interested in legitimate cannabis investments, is to watch quarterly 13F filings to see which marijuana-related names may be attracting interest from professional money managers. Let the big money guys, with their elite teams of analysts, vet the group for you. Then piggyback on their ideas. For instance, in the fourth quarter of 2016, Zynerba Pharmaceuticals (ZYNE) saw 9 funds add to their positions, continuing a trend from previous quarters. ZYNE may merit further consideration. (Zynerba is a component of the HMMJ portfolio.)

13F filings are required to be submitted within 45 days after the end of a quarter, so look for an update of funds’ 1st quarter 2017 marijuana stock holdings on May 15.

While waiting on more and better publicly traded options for investing in the legal marijuana industry, investors interested in the broader health and biotech sector might consider following the 13F filings of hedge funds like Baker Bros Advisors. WhaleWisdom’s Backtester shows that a hypothetical portfolio equally weighted with Baker Bros top twenty picks, rebalanced quarterly, would have returned over 900% since 2001.

Excel Add-in For Mac 2016 and Office 365

Posted on January 3rd, 2017

I’ve just released a completely redesigned Excel add-in to the Microsoft Office App Store. The new add-in features several advances over the existing add-in, including easy lookup of filers and stocks via auto-completion and the ability to use your existing filer groups.

The add-in works with Excel 2016 for either Mac or Windows, Office 365, and Office Online.  An existing premium subscription with is required.

Windows users with versions of Excel prior to 2016 can still use the old add-in.  This add-in supports Microsoft Windows Office 2003 through 2016


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