To beat the bull market, focus on company owners
NEW YORK (Reuters) - For Peter Doyle, manager of the $1 billion Kinetics Paradigm No-Load fund, beating the performance of nearly every other world stock fund over the last year was simple: where competitors diversified abroad, he focused almost exclusively on the U.S.
Over the last three years, Doyle has shifted approximately 95 percent of his portfolio into companies headquartered in the United States, after having a roughly 50-50 split between U.S. and international stocks beforehand. That shift has looked especially smart lately, as the U.S. stock market has jumped more than 14 percent for the year while the Euro Stoxx 50, an index of European blue chips, is up less than 4 percent.
Doyle' reason, however, has little to do with macro issues like the falling U.S. unemployment rate or the stimulus measures provided by the Federal Reserve. Instead, Doyle is aiming at a narrower niche: he is betting heavily on U.S.-based companies in which the largest stockholder also runs the business.
"When you are the largest shareholder, you tend to think about the business differently," he said. "You're thinking about the next 10 or 15 years, not the next quarter. You don't find that in other executives. They're thinking about what their next job will be in two years."
It's a strategy that has worked well for him over the last year. His fund has returned 32.2 percent in that time, which was 5.8 percentage points more than the international benchmark MSCI EAFE index, and nearly 12 percentage points more than the average of 930 funds in his Morningstar category.
The fund compares well with the domestic S&P 500 as well, beating it by approximately 9 percentage points over the last year. This performance came despite an annual charge for investors of $1.64 per $100 invested, a fee level that Morningstar considers high.
It also comes with its risks. Doyle's fund is heavily invested in media, gaming and other consumer discretionary stocks that have outperformed since the recession ended in 2009. A turn in the sector could have an outsized impact on the fund's future performance, said Todd Rosenbluth, director of mutual fund research at Standard and Poor's Capital IQ.
Doyle's portfolio of 77 stocks is full of companies like media group Liberty Media Corp, holding company Icahn Enterprises LP, and real estate developer Howard Hughes Corp in which their operators, who are often billionaires such as Liberty's John Malone, are also some of their largest owners.
The strategy, while it is working now, came about from Doyle's past failures. The fund fell 53.2 percent in 2008, a dreadful performance that was nearly 10 percentage points worse than its benchmark and among the worst showings in its category. Doyle grew frustrated by the bunker-mentality response of management at then-holdings like NYSE Euronext and CME Group.
"They should have been out there aggressively buying back shares so that when the market rebounded their businesses would have rebounded," Doyle said. He adopted his owner-run philosophy after noting the steps some firms were taking.
Liberty's John Malone, for instance, lent then-struggling satellite radio operator SiriusXM Radio Inc $530 million in early 2009. That stake is now worth approximately $8 billion to him and Liberty shareholders, Doyle said, calling it an example of a competitive advantage that owner-operators offer.
This type of management style should help shareholders over time, Doyle argues, citing historical research that he believes still holds true today. Between 1968 and 2000, all ten companies with the highest cumulative returns per dollar invested between their initial public offerings and the year 2000 were run by owner-operators, according to Jeremy J. Siegel, now a professor at the University of Pennsylvania's Wharton School of Business.
Doyle is focused chiefly on U.S. companies because he finds them more attractive than owner-operated companies abroad. Fund holding Beijing Capital International Airport Co., for instance, has seen its shares fall 1.4 percent since the beginning of the year, in part because the government-run company isn't taking the same steps an owner-operator would to boost revenues, Doyle said.
Doyle's portfolio strategy also carries with it the risk of uncertain succession plans. His chief worry is that one of his companies will flounder after the largest shareholder no longer runs the business.
He sees Apple Inc - a company he doesn't own - as a cautionary tale. Current management "may be competent, but they don't have the vision to turn the company on a dime like... (founder Steve Jobs did.)... Apple isn't going to be a great stock in the future because there's not the same passion and skill," he said.
(Reporting By David Randall; editing by Linda Stern and Andrew Hay)
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