Morningstar Advisor - Spring 2008 - 61

trust firm in 1975, then joined InterFirst Bank as a technology analyst a few years after that. Shive worked briefly as a sell-side analyst for Rauscher Pierce Refsnes before moving to a family office in Dallas, where he ran money from 1984 to 1989. Shive still counts that experience as the most formative of his investing life. “Great people, great long-term focus, pure investments, no distractions,” he says. “I also learned to embrace that idea that risk is losing money.” Up until then, however, Shive did not have an independent public track record, and that’s what brought him to 1st Source in 1989. He ran a common trust initially, then the Income Equity mutual fund, which launched in October 1996. Since that launch, Shive has amassed a performance record to crow about: The fund has trounced its large- and mid-cap value counterparts as well as the S&P 500. The fund’s track record also speaks to Shive’s focus on absolute rather than relative returns. During the 2000-2002 bear market, its losses were mild, even though the fund also managed to keep pace during the great bull market of the 1990s. “We’ve evaluated Ralph’s performance over many time periods and he has consistently stood out relative to other managers we’ve used,” says A.J. Paul, an Elkhart, Ind., financial advisor who manages assets for high-networth clients. “He makes money in up markets but often loses less when things are going down. In 2008, no one is having a stellar year so far, but he’s lost less than everyone else.” Don’t Box Him In flexibility and makes room for what he calls “franchise value” stocks—essentially GARP names—alongside traditional value fare. While industrials have long played a big role in the portfolio, he has given the fund more of a growth tilt over the past year or so. “The objective is making money, and I maneuver around a little bit,” he says. Zimmer Holdings 26000 ZMH, the maker of artificial joints, was one 22000 such recent addition. The stock lands in the large-growth square of the style box, but Shive 18000 thinks it’s a great company that was recently 14000 trading at a below-market multiple. 10000 Ralph Shive 1st Source Monogram Income Equity FMIEX $26K 22 18 14 03 04 05 06 07 08 S&P 500 Shive also works hard to avoid so-called value traps—statistically cheap stocks that grow cheaper still—by considering the quality and positioning of the underlying business as well as the current point in the economic cycle. The fund’s recent stance within the financials sector exemplifies his willingness to act boldly if he thinks a sector’s troubles overwhelm stocks’ merits on a bottom-up basis. As the drumbeat of bad news regarding the housing market grew louder in 2006 and into 2007, Shive foresaw the spillover effects for financials stocks, and he reduced the fund’s exposure to the sector. He took the portfolio’s weighting down near the single digits—a dramatic bet for a fund in the large-value group, where the sector is most funds’ biggest weighting. As a result of that reduced exposure, the fund came through last year in fine form, dodging banks’ big losses and scoring big gains from its energy and industrials holdings. Category Large Value 1 Morningstar Rating QQQQQ Minimum Investment $1,000 Expense Ratio (%) 1.15 5-Yr Anl Total Rtn (%) 17.86 5-Yr Anl Investor Rtn (%)* 13.83 5-Yr Anl TR % Rank Cat 2 Stewardship Grade — *Dollar-weighted return that measures how the typical investor in the fund fared. Data as of March 31, 2008. Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Apr-03 Oct-03 May-04Nov-04May-05Nov-05May-06Nov-06May-07Nov-07 May-03Nov-03 Jun-04 Jun-03 Dec-03 Jul-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Jul-03 Jan-04 Aug-04 Aug-03 Feb-04 Sep-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Sep-03 Oct-04 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Aug-05 Sep-05 Aug-06 Sep-06 Aug-07 Feb-08 Sep-07 Apr-04 Dec-04 Jan-05 Feb-05 Feb-06 Feb-07 time to come. (For that matter, he’s concerned that outflows from value funds could affect a host of value stocks, not just financials.) A Long Reading List Shive’s approach to managing client assets is very much in keeping with his sensible, no-nonsense personality—and also speaks to his unwillingness to be pigeonholed. His investment style is distinctly value-oriented, but not dogmatically so; the fund’s holdings are dispersed across the upper two thirds of the Morningstar Style Box. That’s because Shive is emphatic about preserving the fund’s Shive is not inclined to jump back into financials with both feet anytime soon, either. “If you just think they’re cheap and they’ve got a big yield, and you’re going to buy them without putting it in context of the macro picture of what’s wrong, well, that macro piece has been the critical variable,” he says. Shive also pays attention to mutual fund cash flows. He is concerned that managers of some large-valueoriented funds will be forced to sell holdings to meet shareholder redemptions. He thinks such outflows would weigh on financials for some To help stay abreast of secular trends and keep minutiae from overwhelming a head wind or tail wind facing a company or an entire industry, Shive reads voraciously. During the course of our interview, he pulls numerous books off his shelves and cites nuggets of insight. Every day, he reads a number of periodicals; he considers China Daily a must-read, for example. He and the team also prize Williams Inference, a service that culls readings from disparate sources around key themes—anything from teenagers’ social patterns to growth in emerging markets to the latest fashion trends. “It’s like sifting for gold,” Shive says of his MorningstarAdvisor.com 61

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Morningstar Advisor - Spring 2008

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