A Mutual Fund for Everyone
My new favorite mutual fund. (Actually, my first favorite mutual fund.)
I’m in it for the long run, and the less I have to do over the long run, the better.
Someone, somewhere – someone, somewhere in Omaha, probably – said something about a preference for buying wonderful companies at a fair price, as opposed to the reverse. As a former Graham-and-Dodder who was frequently flummoxed when the time came to sell because the companies were frequently less-than-wonderful, I agree. I agree because wonderful companies need selling less frequently.
And another someone, somewhere and somewhat close to the someone, somewhere in Omaha was sufficiently prescient to observe: “The big money is not in the buying and selling… but in the waiting.”
I tend to dismiss clever quotes. Like cliches, they are too facile and too easy to conjure. For that reason, listicles populate and multiply across the internet like rabbits unimpeded by predators. But this quote on the “big money” is true to a point, and only to a point. Waiting must be preceded by committed action predicated on knowledge and expectations of the future set by a historical empirical record of the past buttressed by a priori reasoning that has proved immutable over the millennia.
As for the a priori reasoning, enduring wealth accumulates only through continual cash flow, compounding, and time. The longer, the better, because the longer this “holy trinity” is allowed to proceed unmolested, the greater the wealth that accumulates. Let’s make a marriage of it. At the least, it simplifies life, and is it so wrong to funnel life toward an Occam’s razor paradigm where we can do the most with the least effort with the greatest chance of success? I think not.
This is my investing philosophy. I anticipate years, decades, and even centuries. The earth’s circumnavigations of the sun and an avarice government’s demand for annual tribute hold no sway in my analysis and buy-and-sell decisions.
(Sidebar: I don’t bother with the “wash-sale rule” game – sell stock to capture a loss and repurchase 30 days later as if nothing happened. It’s a game of three-card monte: It’s deceptively obvious, so you’re sure to lose.)
If I distill it all to one concept, I distill it to permanence. I concur with a Philip Fisher’s insight in his useful book Common Stocks and Uncommon Profits. Fisher noted that “if the job has been correctly done when a common stock is purchased, the time to sell it is almost never.”
I’ll concede that “almost never” selling a stock is a difficult proposition because correctly doing the job is a difficult proposition. Even when done correctly, variables beyond our control frequently undermine the best-laid plans. And even when you have done it correctly, your progeny will likely do the job incorrectly once you’ve punched your ticket.
A fund investment offers a solution. Now that I’m on the back nine of life, I’m no longer averse to investing in funds No surprise here, I favor those few “almost never sell” funds for my heirs. The culture of those managing the fund and the fund’s mandate promotes permanence, evinced by a long record of exceptional performance with a low-turnover investment portfolio.
An S&P 500 ETF is an obvious choice. It’s low turnover and it’s cheap, but you can do a little better. Contrary to efficient-market theorists, you can find actively managed funds that have outpaced the S&P 500 over a holding period measured in decades.
I highlighted one fund – a closed-end fund – a few months ago. It is Central Securities Corp. (CET). This CEF has been outpacing the S&P 500 since 1929. Its annual turnover is frequently below 1%. (You can read about Central Securities Corp. here.)
Not quite as long in the tooth as Central Securities Corp., the Voya Corporate Leaders Trust Fund Series B (LEXCX) has also been outpacing the S&P 500 for decades. The Voya fund was created in 1935 with an equal number of common stock shares of leading U.S. companies at the time. Little has changed over the past 88 years. The fund holds 21 stocks of the leading companies within their respective industries.
The Voya fund (technically, a managed grantor trust) is managed passively (though it is no index fund). The Voya fund has been bylawed into passivity and inactivity: The fund is prohibited from purchasing new stocks. Changes are the product of spin-offs or mergers. The money from these transactions can be used to purchase new stock. This is a fund with a whole lot of nothin’ goin’ on.
Voya fund’s top five holdings are composed of the following stocks:
Union Pacific Corp. (UNP) (37% of portfolio value)
Berkshire Hathaway (BRK.b) (14.5%)
Marathon Petroleum (MRO) (11.6%)
Exxon Mobil (XOM) (10.5%)
Linde PLC (LIN) (10.3%)
Perhaps it’s only a coincidence, but it’s surely a point of interest: Berkshire Hathaway is a top-five holding. And like Berkshire’s stock equity portfolio, the Voya fund’s equity portfolio is heavily concentrated at the top. The top five holdings account for nearly 84% of portfolio value.
One stock – Union Pacific – dominates the Voya fund portfolio, as one stock – Apple (AAPL) dominates Berkshire Hathaway’s portfolio. If I were to bet which company will still be roaming the earth in 2123, I would place my money on Union Pacific.
Once on the books, you tend to stay on the books. Union Pacific is the senior citizen of the group. Its shares were bought in December 1988. Marathon Petroleum is the newest member of the five. Its shares were bought in September 2011. The average age of the top five 84% is 23 years. Turnover posts below 1% annually.
The Voya fund maintains a small cash balance to meet redemptions. You can get in on the cheap. The minimum initial investment is only $1,000. Additional shares can be purchased for as little as $50.
Given the fund’s inactivity, you might assume annual fees are held at sea-level lows. After all, funds that replicate the S&P 500 charge 10 basis points or less. You assume wrong. The Voya fund charges 49 basis points annually for its inactivity.
I am insouciant about paying for inactivity when the job of stock selection “has been correctly done.” And haven’t we been told the big money is made in the waiting? And to be a bit more pragmatic, if not a bit lazy, about it: The less we do, the less we screw up, as least that’s what the behavioral finance data suggest.
The Voya fund’s management has at least screwed up less than the S&P 500.
(Sidebar II: If you have “correctly done” your investment selection and portfolio allocation, you should take the swarm of recently issued market predictions for the upcoming year as a time-wasting persiflage. For goodness’ sake, don’t take it as advice and a call to arms.)
I’ll concede the extent of long-term outperformance over the S&P 500 over the past 38 years hardly confers bragging rights. The Voya fund has held 32-basis-point advantage in CAGR over that time, but it is still more, and that matters over time. I’ll also note that the Voya fund held an advantage in “best year,” “worst year,” and maximum drawdown. The statistical stuff – standard deviation, Sharpe ratio, and Sortino ratio – also favored the Voya fund.
(Sidebar III: The top five S&P 500 holdings – Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL, GOOG), Amazon (AMZN), and NVIDIA (NVDA) – have a 25% weighting in the index. Berkshire Hathaway is number nine in the S&P 500 with a 1.6% weighting. Union Pacific occupies the 51st slot with a 0.4% weighting.)
Of course, the S&P 500 and the Voya fund aren’t mutually exclusive. You could construct an efficient and tidy investment portfolio of larger-cap equities with the Voya fund, an S&P 500 ETF, (the Vanguard S&P 500 ETF (VOO) is my choice), and the aforementioned Central Securities Corp. CEF. There is little meaningful overlap within the three except for Alphabet, which has a 5.5% weighting in the Central Securities Corp. CEF and a 3.8% weighting (including both Class A and C shares) in the S&P 500
Some investors might bristle at owning a fund with such an outsized allocation to Union Pacific. Exclude me from the group. I have no idea if Union Pacific was deliberately over-weighted when it was added to the fund in 1988. The prospectus and annual reports offer no insight. I do know that no rebalancing occurs.
I also know that you could have mangled matters worse by having a company other than Union Pacific pull the train. Its CAGR has exceeded the S&P 500’s CAGR by three percentage points over the past 35 years.
Other investors might bristle at paying 49 basis points (or the 50 basis points Central Securities Corp. applies) for passively managing an actively managed investment portfolio. But why when the evidence points to a job “correctly done”? Hiring a plumber is an apt analogy. If you have hired a plumber (and I have), you know what I mean: He fixes your leaking shower head in half an hour and then hands you a bill for $500. Do you feel cheated? I don’t when the job is “correctly done.” Which do you prefer to pay for – time or results?
I find patience an appealing and enviable character trait from both practical and philosophical levels. I vaguely remember from many years ago when a Chinese official was asked his thoughts on the French Revolution. My memory fails on the context or even the reason for the question, but I do remember the answer: “Let’s see what happens.” And this was about a revolution that had occurred 200 years ago. Perhaps you, too, appreciate why Jeff Bezos is spending $42 million to build his 10,000-year clock.
Many investors are less philosophical. They are like the child who has planted a seed and then eagerly reaps the harvest upon germination, ripping it from the ground instead of letting it grow to maturation. They repeat the process and think they are profiting by reaping these tiny rewards. Isn’t the analogy obvious?
Now for the fine print, which isn’t so fine:
I have no business relationship with the companies mentioned. They don’t know me, I don’t know them.
DYOR – Do Your Research. I have opinions, but I am not your personal investment advisor. Always remember the buck stops (and starts) with you. What works for me might not work for you. I’m not responsible for you.
DISCLAIMER: THE AUTHOR DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF THE INFORMATION PROVIDED ON THIS PAGE. THE INFORMATION CONTAINED ON THIS PAGE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.