Morningstar Advisor - Summer 2007 - (Page 45)

Style boxes and modern portfolio theory don’t make sense to an inveterate, omnivorous stock-picker like Osterweis. radio frequency identification technology. In April, it announced registry fee increases of 7% and 10%, respectively, for the .com and .net names. The firm has several opportunities to improve its free cash flow, argues co-manager Stephen Moore, including bolstering the profitability of its digital certificate business, which already helps secure 30% of all North American online transactions. “It’s an extremely profitable company that will be more profitable in a rapidly growing area,” Moore says. A fund this reliant on its stock-pickers, however, has its share of slip-ups. The fund bought Bausch & Lomb BOL in 2001, thinking that new management could unlock the value of its new and core eye-care products. The turnaround was stopped in its tracks in 2006 when the company’s ReNu with MoistureLoc lens solution was linked to a fungal eye infection. The managers, who usually hang with picks through adversity, stuck with the stock at first, but earlier this year, they finally cut their losses when they decided the contact-lens maker wouldn’t get enough growth out of its other products. Since then, however, a bidding war for Bausch & Lomb between its rival Advanced Medical Optics EYE and private equity firm Warburg Pincus has flared over the company and pushed its share price up. Similarly, Osterweis was gnashing his teeth during a conference call with financial advisors earlier this year on the same day another stock the fund had recently sold, student loan company Sallie Mae, was bought for a huge premium by a consortium of private equity investors. But this, too, is a hallmark of the Osterweis style. The fund is willing to miss a bit of the upside to protect its shareholders from the downside. That’s a trait that has made the fund less volatile than the typical mid-cap fund or the market as a whole, despite the portfolio’s concentration. It also has earned the trust of two financial planners who use the Osterweis equity fund. Wetherby Asset Management likes the eclectic nature of the fund and the fact that Osterweis is just as concerned about not losing money as it is about making it, says Christopher Hauswirth, director of research for the San Francisco-based private wealth management firm with $2.5 billion under management. “They’re a lot more absolute-returnoriented than they are relative-return-oriented or benchmark-oriented,” Hauswirth says. Columbus, Ohio, planner Bob Cochran switched his clients’ money to Osterweis because it has a strong long-term record and a still-small asset base. “It’s probably never going to be number one, but it’s also never going to be at the bottom either,” says Cochran, who uses the fund as a conservative mid-cap growth option for his firm’s roughly 300 clients. “It’s a fund that we and our clients can use and probably have no problem sleeping at night.” An Eye for Stocks, and for People so by taking his time and making sure the candidates had a passion and acumen for making money before extending an offer. For example, he knew Berler for years before inviting him to join the firm from Morgan Stanley in 2003. Still, Osterweis made Berler bring in his personal account statements to prove what kind of investor he was. Berler in turn recruited Moore, who had a track record running money for Capital Group, the advisor to the American Funds. Co-manager Michael Hughes joined in 2005 after 16 years with Merrill Lynch. Kovriga is the closest thing the firm has to home-grown talent. Osterweis was his first job out of Harvard Business School, which he attended after earning a Ph.D. in philosophy in the Ukraine and working in consulting. Though Osterweis and Hellman remain the largest owners of the firm, all of the managers also are owners, and their stakes should grow as the founders step back. Hellman, who still has a lot of family money riding in Osterweis-run accounts, thinks Osterweis has prepared the firm well for the future. Hellman has witnessed Osterweis’ ability to stack a team up close. They don’t do many marathons, ultra or otherwise, anymore, but they do compete against each other in“ride-and-ties,” an event that involves horse back riding and running with a partner over dozens of miles. Having a good teammate is essential. And Osterweis’ partner once was the first American to cross the finish line at a Boston Marathon. “His ringer was a bigger ringer than my ringer,” moans Hellman. He thinks his friend has a good eye for investing talent as well “I’m very calm about the future of the place,” he says. K The key to preserving that piece of mind will be the firm’s people. John Osterweis is fit and showing no signs of slowing down. It’s entirely possible he may imitate one his early mentors, legendary investor and family friend Roy Neuberger, and stay active in the markets beyond his 90s. At some point, though, someone else is going to have to take over. At the very least, more people will need to be hired and inculcated with Osterweis’ approach to handle growth. “We can add another billion with the existing team,” Berler says. “Beyond that we need another stock-picker.” So far, Osterweis has been able to attract people with impressive credentials. He’s done Dan Culloton is a senior mutual fund analyst with Morningstar. MorningstarAdvisor.com 45 http://www.morningstaradvisor.com

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

Morningstar Advisor - Summer 2007 Contents Letter from the Publisher Get to Know the Bond “All-Stars” Research Briefs Our Stewardship Test Gets Tougher Save It for Later Too Many Oranges Best of Both Worlds No Two Clients Are Alike When It Comes to VAs, It’s Seller Beware Hands On: Finding the Suitable Fund Share Class for Your Client Fund Style Can Drift Off Course Sticking to Their Style, Through Thick and Thin Marathon Man Growth, With a Chaser A Menu of Ideas to Fill Five Market Baskets Funds: Finding Funds with Conviction Stocks: So You Say You Want Income? All Eyes on China Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web The Advisor’s Economic Moat

Morningstar Advisor - Summer 2007

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