Wood Asset Management
Sarasota, Fla.; 941-361-2195 Founded: 1994 Assets Under Management: $1 billion Investment Management: Five senior portfolio managers oversee 1,252 individual and institutional accounts Philosophy: "A sell discipline is really important. And it's harder than buying because most people in this business are innately optimistic." --Gary Wood, chief investment officer
Knott Capital Management
West Chester, Pa.; 610-918-1951 Founded: 1998 Assets Under Management: $304 million Investment Management: Three senior portfolio managers oversee 773 individual and institutional accounts Philosophy: "We're not all things to all people. We don't do anything esoteric. If you hire us, we'll sell virtually every stock you have." --Charlie Knott, CIO
Santa Barbara Asset Management
Santa Barbara, Cal.; 805-965-4600 Founded: 1988 Assets Under Management: $1.1 billion Investment Management: Investment committee of six oversees 1,173 individual and institutional accounts Philosophy: "We don't sell a stock because a company has missed earnings for one quarter or because some analyst on Wall Street downgrades it. We don't care about that." --George Tharakan, portfolio manager and research director
For years Vince Gangi did his own investing. "I'd be up and down," shrugs Gangi, 50, an executive with Balboa Life & Casualty. That was okay with Vince and his wife, Peggy, until Vince cashed in some -- actually, a lot of -- stock options in Balboa's parent company, Countrywide Financial. The windfall put the Gangis' portfolio into the low seven figures. And that's when Vince had an epiphany: "I wanted a professional manager who could devote 24/7 to my investments." Vince still dabbles in the market for "fun." But as of last March, most of the Gangis' assets are in the hands of professionals at Santa Barbara Asset Management.
Former do-it-yourselfers like the Gangis are looking for a better way to invest. Bank trust advisers and white-shoe brokers have long handled money for the well-to-do. But the fastest-growing segment of the $2.2-trillion market for private asset management is the cadre of stock and bond pickers who leave the financial planning to others and tailor portfolios for those with at least six or seven figures to invest.
First, the nuts and bolts: Private money managers typically require a $500,000 minimum, although some will open accounts for less than that. An annual management fee of 1% of assets is standard, a figure that usually won't decrease much until your account reaches the millions; you'll pay brokerage commissions on top of that. Fees for private money managers are in line with mutual funds and brokerage-sponsored managed, or "wrap," accounts, which combine management fees and trading costs. (Some low-fee mutual funds are much cheaper, however.)
The pros of privacy
There's more than cost and cachet to recommend your going private. You'll be better clued in to how your money is being managed and how your fees are being spent. Statements are personalized and detailed, and newsletters are common. And because your money is kept in a brokerage account, confirmation slips will tell you immediately, and exactly, what your manager is buying or selling, and how much you've paid for the trade. By contrast, mutual funds are required to disclose portfolio holdings only four times a year.
Another key advantage of a private account is that it's, well, private. For instance, because investments aren't pooled, you don't have to worry about paying a capital-gains tax on stocks that appreciated before you joined the pool. When you want some of your money back, your manager will sell the stocks that produce the least-painful tax bite. And no one's hand is forced because too many investors want in or out of the fund all at once.
Of course, the best reason to switch to a private manager is to get better returns. We found plenty of professionals who trounced mutual fund averages. But scrutinizing returns takes practice. Are they reported gross or net of fees? Returns should conform to standards set by the Chartered Financial Analyst Institute, and they should, ideally, be audited. Money Manager Review puts out a quarterly publication and operates a Web site with performance information and manager interviews ($295 a year; 415-386-7111; http://managerreview.com.)
Here's a look at three private stock pickers with impressive, verifiable long-term records. Although each has a different approach and different holdings, any of their portfolios could form the core of a diversified investment plan. The minimum investment for all three is $500,000.
Bargain hunter, up to a point
Gary Wood calls himself a relative-value manager. That means that Wood, who spent 20 years on Wall Street before setting up his own shop, will sometimes buy stocks that bargain-hunting purists would ignore. For example, Symbol Technologies, which makes bar-code-reading equipment, trades at 30 times estimated 2004 earnings -- not tempting to dyed-in-the-wool value investors. Neither is software giant Microsoft, which trades at 22 times calendar 2004 earnings. But along with a handful of other faster-growing companies, they're in Wood's Large Cap Relative Value portfolio. "If you just look at rigid value criteria, you have a portfolio weighted to industries in trouble," says Wood, 64. "That's not the way to do it."
His approach has worked well. For the ten-year period that ended March 31, Wood's portfolio, before fees, returned an annualized 15%, compared with 12% for Standard & Poor's 500-stock index and 11% for the average mutual fund investing in large, bargain-price companies. (Money-manager returns are calculated before fees are taken into account.)
Wood works with a committee of nine professionals, including strategist and Wall Street veteran Robert Stovall, a longtime guest on Louis Rukeyser's TV programs. The committee first formulates an opinion on inflation, interest rates and corporate earnings. Next, the group settles on industries likely to lead. Right now, in the committee's view, that's oil, health care and technology. Wood limits risk by not straying too far from what any one group represents in the S&P 500. Finally, Wood settles on 35 to 40 stocks. Top holdings recently: General Electric, Johnson & Johnson, Microsoft and Pitney Bowes.
Selling is disciplined. "We're not nursemaids," says Wood. He recalls buying Xerox and Motorola in 2000 after shares in both companies fell from around $60 to $20. "Almost as soon as we bought them, everything went bad. Xerox started talking about bankruptcy, and Motorola couldn't sell phones to its mother. We started selling both stocks at around $18.50."
Clients' portfolios are similar, but can be tweaked to suit individual tastes. Says Wood: "We have a lady who is a Christian Scientist. She doesn't buy drug stocks. Or, for a less aggressive account, we'll put a little more in Washington Mutual, yielding 4.4%, and a little less in Microsoft, yielding 0.6%." Try that with your mutual fund.
Trend spotter
Charlie Knott believes that 80% of portfolio performance is picking the right industries. To do that, Knott, a veteran of bank trust departments, starts with an economic outlook and an interest-rate forecast. To formulate these, he pores over everything from Federal Reserve policy and monetary data to currency and globaltrade numbers. For the record, Knott, 63, believes that rising inflation will become the market's main worry, eventually pressuring corporate-profit margins amid a backdrop of rising interest rates.
Like many private managers, he prides himself on protecting his clients during down markets. In 2000, when the S&P 500 lost 9%, his U.S. stock portfolio was up 21%, before fees. In 2001, the score was Knott, up 5%, S&P, down 12%. And when Knott's portfolio succumbed to losses in 2002, they were half what the broader market suffered. For the five years through March 31 (the portfolio was launched in 1998), Knott returned an annualized 10% (pre-fees), about twice the average return of funds that invest in companies of all sizes. The S&P 500 lost 1% a year over that period.
No one can accuse Knott of being a closet indexer -- that is, hewing closely to the S&P 500. Oil stocks account for 16% of his portfolio, compared with a 6.6% representation in the index; health care accounts for 22% of Knott's holdings but just 13% of the S&P. Within health care, Knott has recently shifted from large drug companies to veterinary suppliers such as Idexx Labs. "We realized big drug companies were losing pricing power. Pet and livestock owners don't have a third party to answer to." Knott's top holdings are natural-gas producer Chesapeake Energy, cable giant Comcast, and Florida real estate developer St. Joe Co.
There's nothing Knott loves more than spotting a trend and playing it right. Early in 2002, he looked for inexpensive restaurants to invest in, believing that economic recovery would begin with relatively low-paying jobs. Ruby Tuesday ended up being a trend two-fer because it was among the first to introduce a low-carb menu. Knott bought at $20 and below, and sold last fall at $28. He says he got lucky, but good investors make their own luck.
Fan of market leaders
Santa Barbara Asset Management lives up to the reputation of its hometown: laid-back and relaxed, but with returns that are hot. And in true California style, portfolio manager George Tharakan, 36, and an investment committee of six march to the beat of their own drummer. Economic outlook? Whatever. Betting on industries? Not interested. What does Wall Street think? Who cares! Instead, the managers buy stock in businesses they like and hold on until the business outlook changes, trimming only to pocket profits along the way.
The methodology has drummed up impressive returns. Santa Barbara's Stable Growth portfolio -- a collection of 40 to 50 mostly large companies with robust earnings growth -- gained an annualized 17% over ten years, before fees. That compares with 12% for the S&P 500 index and 9%, on average, for mutual funds that invest in large, fast-growing companies.
Santa Barbara achieved these gains by investing in what managing director Richard Boutin calls "extremely boring" stocks. The Santa Barbara team screens the entire domestic universe of roughly 5,000 stocks for companies that have reported a minimum of 10% annual earnings growth for at least the last six years. That narrows the list to 300 to 400, from which the firm's four analysts try to pluck industry leaders. The firm's purchases tend to be long-standing commitments. It has owned insurer Aflac for nearly ten years and retailer Bed Bath & Beyond for nearly eight. Currently, the top holdings include communications-equipment maker Qualcomm, bar-code leader Zebra Technologies and Fastenal, a nuts, bolts and screws supplier.
Do-it-yourself investors might have to adjust to life with a private money manager. Boutin recalls that in 1998, the firm heard from frustrated clients when it started trimming technology holdings, Hewlett-Packard in particular. But Santa Barbara's thinking was that if HP's most profitable division was its printer unit, why not buy Lexmark, an IBM spinoff that makes good printers and profits nicely on ink to boot. Lexmark, one of the firm's top ten holdings, is up more than 30% since its purchase, while HP is down some 50%. The lesson: "Don't constrain us," says Boutin. "It's silly to pay us for your work."
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