Posted on May 16th, 2017
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 WhaleWisdom.com, 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.