Morningstar Advisor - Fall 2007 - (Page 55)

have as well. For many years, they have seen that the thing sort of works. It’s awful nice for analysts to do what you and I do, Jean-Marie. I have been an analyst for over 50 years, and I’m still waiting to lose my first night’s sleep worrying about the market, worrying about securities. Once you sign off on safe and cheap, it’s just a nice, stimulating, non-worry business. JME: I’m not as positive as you are about the fact that it’s easy work [laughter], and that one does not worry too much—although I agree that by not focusing on the day-to-day fluctuations of securities prices, in a sense by ignoring them, we obviously save a lot of aggravation. But there is a great importance to the team of in-house analysts. Because we look at securities with a long-term orientation, most of Wall Street sell-side work is not truly helpful to us, because their focus is more on what will precipitate an increase in the price of the stock over the next six to 12 months. In our shop, there is no genuine distinction between portfolio managers and analysts. We’re all analysts to begin with. Listening to you, Martin, since we started talking here, I can hear that you talk like an analyst. ‘License to Steal’ management contract. In terms of the public, our shareholders, I have a great community of interests with them, in that the majority of my family’s fortune is invested in our shares, which is very rare among mutual funds, that people eat their own cooking. I feel the obligation to the public, despite that greedy speech I made about the George Washington tollbooth. We try to keep fees modest, we don’t have any 12b-1 fees, not going to have a load, and the only redemption charge is for short-term money. Most important, in all my years in business, the public has always been hosed, with the real-estate tax shelters, private equity, two and 20, oil and gas deals, margin buying—they’ve always been wiped out. I don’t know what genius made it up, but the mutual fund industry is so effectively and strictly regulated; it’s the only area, in my experience in business, where the public gets close to an even break. The Investment Act of 1940 gives the public all these benefits and substantive protections. At the same time, it allows promoters like Jean-Marie and myself to get ungodly rich. [laughter] JME: The mutual fund industry has its flaws, but nothing is perfect. It’s the case of an industry that has hurt shareholders much less than other money management schemes. To begin with, the fees are low—especially in comparison to hedge funds. Number two, mutual funds do not use leverage. The way you can really kill your investors, of course, is when you’ve used leverage and you’re wrong. I was struck to see that some of the Goldman Sachs funds were down 20% in a month, even though the assets they own were down only 3% or 5%, but they were leveraged 5, 6, or 7 times. When you’re leveraged 5, 6, or 7 times and your assets are down 3% to 5%, in fact you’re down 20% or more. But, as I’ve said before, many mutual funds in the end, and it may be a slow death, will be squeezed between the very cheap index funds and absolute return investors. Incidentally, when institutions and individuals looked at the bear market between the spring of 2000 and 2003 and saw that conventional money managers had lost 30%, 40%, they said, “Oh, we have to find something else.” And they came across hedge funds and private equity, which the Harvard and Yale endowments had discovered themselves 15 years before. And so, with the help of consultants, they moved into so-called alternative assets with delight. I think it’s Jeremy Grantham [chairman of Grantham, Mayo, Van Otterloo & Co.] who recently said, “Over the next five years, private equity will provide no returns except the 2% to KKR and other private equity firms.” It will truly be a case of “Where are the customers’ yachts?” As far as hedge funds are concerned, I suspect that many will not provide the absolute returns they’re supposed to provide, and accordingly, as Grantham predicts, maybe half of them will fall by the wayside. MW: Let me just talk about private equity, limited partnerships and tell an old story. A limited partnership is a business or investment association where, at its inception, the general partner brings experience to the situation, and the limited partners bring money. At the end of the limited partnership, the general partner has the money, and the limited partners have the experience. [laughter] K MW: I got in the business in 1984 when I did a hostile takeover of a closed-end, my first fund. It took me a long time—I’m sometimes not too swift—to find out that the business was a license to steal. [laughter] It’s better than having a tollbooth on the George Washington Bridge. All cash business, no credit risk, no inventory, you are the principal overhead. It is a fantastic business, not only fun and interesting, but you make a lot of money. It took me a long time to realize that in the fund business, the value is not in buying at a discount. The value is in having a View video excerpts of Eveillard and Whitman’s conversation at http://MorningstarAdvisor.com/Conversation.asp MorningstarAdvisor.com 55 http://MorningstarAdvisor.com/Conversation.asp http://MorningstarAdvisor.com

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Fall 2007

Morningstar Advisor Fall 2007 Features Departments Letter from the Editor Inbox 10 Years After: Developing Markets Make Progress Research Briefs Investors Should Adjust Their Home Bias Few Mutual Funds Exhibit Serial Correlation Valuating ETFs, the Equity Analyst's Way It’s All About Location See the World (Differently) The Return of the Global Flexible Investor Map of International Value Sound as a Loonie? Fair Exchange In Their Own Worlds A Good Read Putting Their Heads Together Buying Protection Scoping Out Easy-to-Use Funds Finding Good Stewards Consumer Firms Go Global Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities New at Morningstar The Whole Wide World

Morningstar Advisor - Fall 2007

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