NEW YORK Portfolio manager Joe Huber may be little-known outside of Los Angeles, yet his acclaimed low-turnover strategy has been making waves on Wall Street for several years.
The $228 million Huber Capital Small Cap fund as well as his $47.5 million Huber Capital Equity Income fund have posted returns that rank in the top one percent of their categories over the last five years, according to fund-tracker Morningstar.
The success of the Lipper Award-winning small-cap fund, which has gained an annualized 16.7 a year since 2008 - more than any other fund in the Morningstar category - has attracted so many dollars that Huber recently closed the fund to new institutional investors.
Yet for the first time in his firm's short history, Huber is facing the bane of all fund managers: the possibility of appearing to be simply average. His small cap fund is up a healthy 22.4 percent for the year through August 22. But in a bull market that has pushed the small cap benchmark Russell 2000 index up 23 percent, Huber's performance is only good enough to put him in the middle of the 370 funds in his Morningstar category.
So far, Huber says, that slowdown does not bother him.
"There's only been about 150 investment days this year, and we think in much longer periods of time," Huber said. "You don't need to be Number One every single time period. You need to be Number One overall."
How he responds will be a test of his low-turnover strategy, which has helped attract institutional clients from the California Public Employee's Retirement System to British Airways to United Auto Workers' plans for employees at Ford and General Motors.
In both his equity income and small cap funds, Huber looks for companies with sustainable advantages, like strong brand names or solid balance sheets that generate large amounts of free cash they can either reinvest in the business or distribute to shareholders as dividends or buybacks. These types of companies are the most likely to continue their outperformance rather than reverting to the mean, said Huber, who majored in statistics at Northwestern University.
He tends to add or remove fewer than 10 companies a year from his portfolios, and holds on to his positions for an average of three to five years. Yet if his fund continues its middle-of-the-pack performance, Huber - who says he "wants to beat everyone, not just the benchmarks" - may be tempted to adopt a more active trading strategy in order to continue attracting assets.
"There's obviously skill with stock picking here, because you couldn't have two funds that are more different in their mandates," said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ. "These are good funds that fly below the radar of investors. But investors haven't been gravitating to smaller firms as much as they have in the past."
Huber established his eponymous firm in 2007 after stints working at Hotchkiss & Wiley, Merrill Lynch and Goldman Sachs. Now based in an office park in El Segundo, a Los Angeles beach town in the shadow of LAX, that city's international airport, his firm manages approximately $2.5 billion across its mutual funds and separately managed accounts.
Though the focus of his funds differs - the equity income is more concerned with dividend-paying large cap stocks, while the small-cap value holds some of the smallest publicly traded companies on Wall Street - there are several constants. Huber, who took classes with noted behavioral finance expert Richard Thaler while getting his MBA from the University of Chicago, emphasizes avoiding what he sees as flaws in investor psychology.
Those flaws include things like assuming that a company that is doing well now will continue to do well in the future, and not realizing that a potential catalyst for growth is already built into a company's share price, he said. When making his decision, Huber attempts to combine a fundamental analysis of the company's balance sheet with how it is perceived by other investors.
The top holding in both his small cap and income funds, for example, is CNO Financial Group, a $3.2 billion market cap insurance company whose shares are up 55 percent for the year to date. Huber, who assigns an overall value to a company by putting a price on its individual business lines, was attracted to the company after it closed most of its money-losing, long-term care policy business to new customers.
That segment took up approximately 60 percent of the firm's capital, Huber noted. Closing it allows the firm to shift 6 percent of its resources a year to its more profitable term life and Medicare supplement insurance lines, giving it an extra 1.2 percent of growth, he said.
"From an aggregate point of view, this is a sleepy company with business growing slowly, and that's what the market sees," Huber said. "We see a company that's by far the fastest growing out there because of this mix shift."
Other large holdings in the 50-stock small-cap portfolio include money management firm Virtus Investment Partners and apparel maker Iconix Brand Group. Among positions in the 44-stock equity income fund are Microsoft Corp, Pfizer and Philip Morris International.
Both of Huber's funds have well-below average turnover, a result of waiting for a company's shares to drop before he moves in. Huber had long been interested in nutrition company Herbalife, for example, but waited until after hedge fund manager Bill Ackman announced its short position on the company. The stock dropped 21 percent, and Huber began buying.
"Ackman brought out all these red flags that we had seen and, now that they were understood in the marketplace, they were embedded in the stock price and allowed us an entry point," Huber said. The stock is up approximately 92 percent for the year to date.
If Huber's year-to-date performance doesn't rebound, high fees may put off new investors, Rosenbluth said. Huber's small-cap fund charges $1.85 per $100 invested, well above the average of $1.40 per $100 charged by actively managed firms, while the equity income fund charges $1.49 per $100 invested.
(Corrects paragraph 14 to show CNO closed most, but not all its long-term care business)
(Reporting by David Randall; editing by Linda Stern and Gunna Dickson)