The best fund manager of our time
Robert Rodriguez has accomplished the unheard-of-feat: driving staggering returns in both a stock and a bond fund for more than two decades.
(Money Magazine) -- To invest in a mutual fund is to make a bet on the future. Whether that bet pays off is a function of how skillful the fund manager is, how lucky he is, how well the market does and how well the manager treats you.
The first two factors are very difficult to measure or predict, and the third is impossible to know in advance. But the fourth is quite easy to evaluate. You want a fund manager who will charge reasonable fees, keep his fund from growing too big for your own good, think independently and courageously and communicate his actions and intentions clearly.
You also want someone who will invest his own money alongside yours - and who knows how much it hurts to lose it. The best fund manager, then, combines a long and convincing track record of excellent performance with a fierce dedication to treating his investors fairly.
Our vote goes to Robert L. Rodriguez of the FPA Capital and FPA New Income funds. Ever since mid-1984, Rodriguez, now 59, has led these two funds to the front of the pack, the investing equivalent of running two marathons at the same time. Overseeing both a stock and a bond fund is so hard that well over 99% of all fund managers lack the guts to even try it - and nobody has ever done both better than Rodriguez.
At FPA Capital (FPPTX), a fund specializing in smaller U.S. stocks, Rodriguez has outperformed Standard & Poor's 500- stock index by an annualized average of 3.9 percentage points; he has beaten the Russell 2000 small-stock index by six points annually. And at FPA New Income (FPNIX), Rodriguez has never lost money in a calendar year; he has outlegged the Lehman Brothers aggregate bond index by 0.2 percentage points annually since 1984. In bond investing, a game of inches, that's a country mile.
Bob Rodriguez has achieved all this while steadfastly treating his investors fairly. Perhaps because he is the largest individual shareholder in each fund, FPA Capital charges only $8.60 in annual expenses per $1,000 invested (barely over half the average cost of a U.S. stock fund), and New Income costs just 0.62% in annual expenses.
Rodriguez also periodically closes his funds' doors, ensuring that too much new money won't flow in too quickly; FPA Capital has not accepted new shareholders since 2004 (though New Income is still open).
When the funds are open, he deters short-term traders with a 2% redemption fee on shares held for three months or less. (Because the funds are distributed by financial advisers, there's also a maximum sales charge of 3.5% on New Income and 5.25% on Capital. But if you hold on for a few years, their lower annual expenses more than make up for the sales charge.)
By preventing asset elephantiasis, Rodriguez protects his ability to be a patient and choosy buyer of only those stocks that he believes are the best bargains. He usually holds as few as 25 stocks, packing up to 40% of assets into the top 10 and hanging on for three to five years at a time.
Industrywide, the typical fund has nearly 100 stocks, with less than 25% in the top 10 and an average holding period of less than one year. Last June, Rodriguez gave a speech that warned of the coming credit crisis so accurately that it reads with hindsight as if he had been peering into a crystal ball.
Taking his own warnings to heart, Rodriguez raised cash to levels high enough to withstand a nuclear war: 43% in FPA Capital and roughly 66% in New Income. In December he declared a formal moratorium on buying any stocks or high-yield bonds until he felt it was safe to invest again - essentially putting both portfolios into a state of suspended animation. As of press time he has not lifted that moratorium.
He still owns electronics distributor Avnet (avt), apparel retailer Foot Locker (fl) and drilling company Patterson-UTI Energy (pten), among others, which he describes as "market-leading companies with strong balance sheets."
Throughout, Rodriguez has been forthright with his shareholders, warning that his funds are not appropriate for an investor who wants quick results or wishes to replicate the returns of the overall stock and bond markets.
Rodriguez has another strength: He knows how much it hurts to lose money. His grandparents, wealthy landowners in Mexico, were wiped out in 1916 when the government seized their assets as punishment for sympathizing with Pancho Villa's revolutionary movement.
Rodriguez grew up in Los Angeles, where his father worked as an electroplater. In fifth grade, assigned to write a letter to a stranger, he picked William McChesney Martin, chairman of the Federal Reserve Board. Martin replied personally, signing up Rodriguez as the youngest subscriber to the "Federal Reserve Bulletin," and an investing junkie was born.
Fresh out of college in 1971, Rodriguez jumped into the hot growth stocks of the day. "I thought if you couldn't compound money at 20% to 25% a year, you were basically incompetent," he recalls.
Then came the bear market of 1973-74. His favorite stock, a recreational-vehicle company called Executive Industries, started dropping from his initial purchase price of $22 a share. He bought more all the way down to $8, when he ran out of money. (His average cost per share was in the low teens.) The stock hit bottom at 88¢. The memory still haunts Rodriguez, who explains with a bitter laugh: "When somebody says to me today, 'This stock can't go any lower,' I say, 'Au contraire!' "
The lesson didn't stop there. "I learned that if you make a mistake and you don't tear it apart to see what you did wrong, you're going to repeat it in the future. I learned that fear is a terrible thing to have." He adds, "The best way to minimize your fear is to have a solid understanding of the companies you invest in."
Searching for answers in the library at the University of Southern California, where he was studying for his M.B.A., Rodriguez discovered Benjamin Graham and David Dodd's Security Analysis. Graham and Dodd helped him realize that chasing hot stocks was no way to pile up cold cash; instead, Rodriguez began to look past the fluctuating prices of stocks to determine the enduring value of the underlying businesses.
He realized that Executive Industries, trading at less than $1 a share, had $2 a share in cash and $3.50 a share in real estate - plus an ongoing business that should bounce back once the recession ended. Instead of selling, he held on for dear life and eventually got out for around $22 a share, turning a nice profit on a stock that Wall Street had left for dead.
"I realized then," he recalls, "that if I can survive the downturn I can live to participate in the upturn." According to Rodriguez, a true contrarian has to feel comfortable being lonely. And that, he says, means you can shrug off three unpleasant questions. The first is "Don't you know that...?" The next is "You're buying what?" And the third is "Are you nuts?"
So even as the stock market kept stumbling lower in early 2008, Rodriguez sat on his hands. He thinks that housing will continue to get hammered and the credit crisis will get far worse before it gets better. Instead, he and his analysts have been scrutinizing dozens of companies, primarily in retailing, technology and energy. (Convinced that financial stocks have further to fall, he thinks it will be "at least another year" before any bargains will be had there.)
If he remains true to form, Rodriguez and his team will spend the coming months learning everything they can about the values of these underlying businesses while stock prices continue to drop. When the stocks on his buy list finally get cheap enough, Rodriguez will have hundreds of millions of dollars to deploy into companies he will understand better than many of the sellers do.
Rodriguez recently moved his office from Los Angeles to his home on Lake Tahoe. He believes that being able to look out over the water has given him a different perspective, helping him see the credit crisis coming.
Living in Nevada also frees him up to indulge in his hobby of racing Porsches around desert racetracks at speeds of up to 180 mph. "It's not speed that kills," laughs Rodriguez. "It's that sudden stop at the end."
He might as well be talking about the market. And you don't have to invest in his funds to learn from his technique: Keep your foot on the brake when other people are going dangerously fast, and when they all slam on the brakes, tap the gas pedal and swerve past them.