NEW YORK One of the best mutual fund performances over the last year was turned in by a father-son team with their own money on the line.
Approximately 40 percent of the assets invested in the $41.7 million Towle Deep Value Fund can be traced to managers Woody Towle, his son Christopher Towle and the employees of their St. Louis-based firm.
The Towles' bets on themselves are significant in an industry in which fund managers are not required to invest in their own products, and they - and their outside investors - have been handsomely rewarded. The go-anywhere equity fund is up 56.7 percent for the year through October 25, or about 30 percentage points more than the benchmark Standard & Poor's 500 stock index, and is in the top one percent of its peers, according to Morningstar.
That outsized performance was due in large part to well-timed moves into Goodyear Tire and Rubber Co, freight transporter Arkansas Best Corporation, and grocer Supervalu Inc, all of which are up over 60 percent over the last twelve months. Lately, the fund has been moving into small-cap energy stocks like Cloud Peak Energy Inc and PBF Energy.
Investors could consider the Towles' personal stake in their go-anywhere stock fund a good long-term sign. Funds in which at least one manager has invested $1 million or more have returned an average of 9.1 percent a year over the last five years, according to Morningstar data, compared with a 6.5 percent annualized return for funds that had no manager assets invested. In all, approximately 49 percent of funds have at least one manager with their own money in the fund.
"When you have an investment team of five guys and everyone has their own money in the fund, it makes for a highly-focused, very intensive process," said Christopher Towle, 46.
He attributes the fund's success to the decidedly old school investment screening process created by his father, Woody, who founded Towle & Co in 1981. The senior Towle, who just turned 70, developed his contrarian stock-picking strategy as he managed private accounts.
All told, the firm claims that its approach has helped it return an annualized 13.2 percent after fees over the last 20 years for its private clients, compared with an 8.8 percent annualized return for the S&P 500.
Its methods rely on such value investment standards as searching for stocks that recently hit five-year lows and leafing through binders of Value Line reports. When evaluating a stock, the Towles focus on metrics like price to sales, a low price to book value, and whether the stock is trading below its 50-day moving average.
"My father has to be one of the best Value Line users on the planet," Towle said.
BIG BETS ON SMALL CAPS
The fund itself is "market cap agnostic" but often ends up investing in small and micro-cap stocks because the opportunity is greater, Towle said. Morningstar and Lipper consider the fund a small cap value fund, in part because approximately 72 percent the funds' 33 holdings are in smaller, riskier companies.
Betting on a sector is also common.
"You start looking at a company that looks promising and then screen for their competitors, and it will hit you that 'Whoa, they're all cheap,' and a theme will emerge," Towle said.
That's the case with the fund's most recent purchases. A former spinoff of mining giant Rio Tinto PLC, Cloud Peak Energy is one of the largest producers of thermal coal in the U.S. At $16 now, shares of the $931 million market cap company are down approximately 20 percent for the year as U.S. demand has dropped. Yet Towle expects that the company's low costs and strong balance sheet will help its shares rebound when coal prices begin to recover.
The fund began buying shares at $15.35, and expects them to rally to $25.56, an approximately 66 percent gain.
Towle recently bought another underperforming small-cap energy producer, Swift Energy, on the theory that management will either significantly improve the business or the board will sell the company. Swift, a $593 million market cap driller, has stakes in approximately 1,120 U.S. gas and oil wells.
The company's shares are down 11 percent for the year and, at $13.50, trade at approximately 50 percent of its book value, compared with an average of 1.35 times book among its peers tracked by Thomson Reuters.
"The investment community has lost confidence and abandoned the stock," Towle noted. In part because he believes that the market is undervaluing its well reserves, Towle expects the stock to jump approximately 40 percent from its current price to $18.79.
The fund will need to weather a downturn in the small-cap market to prove that their success hasn't been a fluke, said Todd Rosenbluth, director of mutual fund research at S&P CapitalIQ.
"The fund is benefiting from investor interest in small caps, but at the same time it's picking the right small cap stocks," he said.
Investors who want to join the Towles in investing in their fund will pay $1.20 per $100 invested, a level that Morningstar considers average.
(Reporting by David Randall; Editing by Linda Stern and Nick Zieminski)