A couple of years ago, our colleague Tej Shah wrote a blog What comes first – Strategy or Structure? arguing why strategy should dictate structure and not the other way around like in majority of large organisations. At Marcellus, our endeavour is to find the few companies who retain the fluidity in their structure to let the strategy drive business. In this piece for the Intelligent Investor column, Jason Zweig writes about a little-known investor who walks this talk in the world of asset management. Wilmot Kidd, now 80yrs old, runs a closed ended fund which has outperformed the S&P500 over the past 25, 30, 40 and nearly 50yr timeframes.
“In 1962, the business historian Alfred D. Chandler wrote that “unless structure follows strategy, inefficiency results.”
At most asset managers, strategy follows structure instead. As a result, funds own too many stocks, trade too frequently and charge too much.
No wonder most active managers underperform market-tracking index funds that charge a fraction of their fees.
At Central Securities, Mr. Kidd ensured that structure has followed strategy—with astounding results.
…Portfolio managers brag about being “long term” if they hold stocks for a year or so. Mr. Kidd makes those folks look like day traders. He has often held stocks for longer than many other portfolio managers have been alive. Central has owned Analog Devices Inc., its second-largest position, for 34 years. Mr. Kidd held Murphy Oil Corp. for more than four decades, from 1974 to 2018.
Over the past 15 years, Central’s annualized portfolio turnover rate has averaged 11%. That means it holds its typical stock for nearly a decade—roughly six times longer than the average active mutual or closed-end fund, according to Morningstar.
Owning stocks for years, rather than months, minimizes the costs of trading, reduces the burden of researching new holdings and enables Central to burrow deeply into understanding a business.
“We want to own growing companies during as much of their period of growth as we can,” says Mr. Kidd. That enables compounding to work its magic.
…Another way Central’s structure follows Mr. Kidd’s strategy: The fund doesn’t hold tiny positions in hundreds of stocks. “We’ve always felt you had to concentrate,” he says. “You’ve got to have a few big positions, you’ve got to own a lot of what works.”
The average actively managed U.S. stock fund owns at least 160 stocks and has only a third of its assets in its top 10 holdings, according to Morningstar. Central has 33 positions, with fully 57% of its money in its 10 biggest.
Isn’t that risky? As Mr. Kidd wrote in his 1978 annual report, “Risk may be reduced through active and more intimate knowledge of the problems of companies in which we invest.””
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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
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