Morningstar Advisor - October/November 2010 - 47

point on that same benchmark during the trailing 15 years. “Why doesn’t Kent Croft have billions of dollars in the fund?” asks Adam Bold, founder of The Mutual Fund Store chain and a large shareholder who was attracted by the firm’s long-term track record. The only reason, 18000 he says, is “because nobody has heard of it.”
14000

money came from a single institutional account that followed Gordon Croft from T. Rowe, but that client soon pulled out its money when its board got spooked about using a small, unproven firm. As assets dropped to around $100 million, the pair hunkered down managing separate accounts. They added two mutual funds in 1995, Croft Value and a companion fixed-income fund, Croft Income CLINX. A second son, Russell, become a fund manager in 2006, after several years at Gabelli & Co.
Generating Ideas

The Crofts

Croft Value CLVFX
$18K

14 S&P 500 TR 10

Family Reunion
10000 Just three blocks separate Croft-Leominster and T. Rowe Price in downtown Baltimore, but 6000 the ties between the two firms are even closer. Gordon Croft was hired at T. Rowe in 1967 and spent 22 years at the company as an investment counselor, director, and fund manager. Croft became well-schooled in T. Rowe’s growth stock-picking strategy. But while he was there, he was also given freedom to explore investment ideas—at either end of the market-cap and style spectrum and located here or abroad. That approach can 14000 be seen in Croft Value—it is an all-cap fund that features domestic value stocks, but it has some growth and international 12000 names, too. And, ultimately, the independence 10000 T. Rowe gave him as a fund manager made it easier for Croft to open his own firm. 8000

The underlying strategy that drives Croft Value starts with ideas. The Crofts will typically consider 1,000 investment ideas a year, generated by four to five in-house analysts, Wall Street, independent research houses, and a network of what the company calls “deep thinkers”—money managers, academics, or industry types that the team calls from time to time to trade insight. Those ideas are then rigorously vetted. Team members at Croft will study traditional value benchmarks like price/earnings, price/ book, cash flow, and what they call “assets on the ground.” They will compare each financial metric with those of peer companies, the category, or the broad market. There are no hard-and-fast rules about whether a stock has to be trading at a certain discount—although the team prefers to purchase shares at $0.80 on the dollar or cheaper. Catalysts are also important, like surprise earnings or a new hit product. Ultimately, a watch list of 200 firms will lead to 80 fund holdings. That strategy creates a portfolio that’s hard to pin down. Croft Value has 61% of its assets in mega- and large-cap stocks, 31% in medium-sized companies, and 8% in smalland micro-cap names. Familiar stocks like Philip Morris PM and Bank of America BAC sit alongside relative unknowns, such as top holding Petrobank Energy and Resources (a Canadian firm) and Dutch biotech outfit Qiagen QGEN.

06

07

08

09

10

Category 4 Large Blend Morningstar Rating

Expense Ratio (%) 1.32 5-Yr Anl Total Rtn (%) 1.92

Jan-06 QQQQ

Jan-07

Jan-08

Jan-09

Jan-10

Feb-06 Jul-06 Dec-06May-07Oct-07Mar-08Aug-08 Feb-09 Jul-09 Dec-09May-10 Mar-06Aug-06 Feb-07 Jul-07 Dec-07May-08Oct-08Mar-09Aug-09 Feb-10 Jul-10 Apr-06Sep-06 Mar-07Aug-07 Feb-08 Jul-08 Dec-08May-09Oct-09Mar-10Aug-10 May-06Oct-06 Apr-07Sep-07 Apr-08Sep-08 Apr-09Sep-09 Apr-10Sep-10 Jun-06Nov-06 Jun-07Nov-07 Jun-08Nov-08 Jun-09Nov-09 Jun-10

Minimum Investment $2,000

5-Yr Anl TR % Rank Cat 6

Croft Income CLINX
$14K BarCap US Agg Bond TR USD 12

10

In the mid-1980s, Kent Croft was working in the equities department at Salomon Brothers. At the time, Salomon was run by John Gutfreund, the Wall Street legend later depicted in the Michael Lewis bestseller, Liar’s Poker. Although Croft avoided the fixed-income shenanigans that later plagued the company, he realized Salomon wasn’t a permanent home. He moved back to southern Maryland and worked on real estate deals for a year while living in a house a mile out in the woods. He and his father then hatched the idea for their own firm. The Crofts opened Leominster, Inc. in 1989 with roughly $500 million under management. (Leominster references a town in England where there is a Croft Castle. The family name was added several years later.) Half of that

06

07

08

09

10

Category 4 Long-Term Bond Morningstar Rating

Expense Ratio (%) 1.10 5-Yr Anl Total Rtn (%) 4.15 5-Yr Anl TR % Rank Cat 78

QQ
Minimum Investment $2,000

Jan-06Jun-06Nov-06Apr-07Sep-07Feb-08 Jul-08 Dec-08May-09Oct-09Mar-10Aug-10 Feb-06 Jul-06 Dec-06May-07Oct-07Mar-08Aug-08Jan-09Jun-09Nov-09Apr-10Sep-10 Mar-06Aug-06Jan-07Jun-07Nov-07Apr-08Sep-08Feb-09 Jul-09 Dec-09May-10 Apr-06Sep-06Feb-07 Jul-07 Dec-07May-08Oct-08Mar-09Aug-09Jan-10Jun-10 May-06Oct-06Mar-07Aug-07Jan-08Jun-08Nov-08Apr-09Sep-09Feb-10 Jul-10
Data through Aug. 31, 2010

MorningstarAdvisor.com 47


http://www.MorningstarAdvisor.com

Morningstar Advisor - October/November 2010

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2010

Morningstar Advisor - October/November 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What estate-planning strategies are you and your clients doing before the end of the year?
Next Steps for ETFs
Investment Briefs
Taking It Personal
A Model Practice
Find the Right Fit
Will REITs Put You in the Penthouse?
Prepare for the Worst
Tips for Common Family Situations
Might Makes Right
Built to Last
Four Picks for the Present
Tactical Strategies Miss Their Mark
Time to Hop on the Commodities Bandwagon?
Retailers Balance Caution and Catalysts
In Search of … Recession Survivors
Turmoil-Tested Small-Cap Funds
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Rise in Second Quarter
The Third Rail
Morningstar Advisor - October/November 2010 - Intro
Morningstar Advisor - October/November 2010 - Morningstar Advisor - October/November 2010
Morningstar Advisor - October/November 2010 - Cover2
Morningstar Advisor - October/November 2010 - 1
Morningstar Advisor - October/November 2010 - 2
Morningstar Advisor - October/November 2010 - Contents
Morningstar Advisor - October/November 2010 - 4
Morningstar Advisor - October/November 2010 - 5
Morningstar Advisor - October/November 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - October/November 2010 - 7
Morningstar Advisor - October/November 2010 - Contributors
Morningstar Advisor - October/November 2010 - Letter From the Editor
Morningstar Advisor - October/November 2010 - What estate-planning strategies are you and your clients doing before the end of the year?
Morningstar Advisor - October/November 2010 - 11
Morningstar Advisor - October/November 2010 - Next Steps for ETFs
Morningstar Advisor - October/November 2010 - 13
Morningstar Advisor - October/November 2010 - Investment Briefs
Morningstar Advisor - October/November 2010 - 15
Morningstar Advisor - October/November 2010 - 16
Morningstar Advisor - October/November 2010 - 17
Morningstar Advisor - October/November 2010 - Taking It Personal
Morningstar Advisor - October/November 2010 - 19
Morningstar Advisor - October/November 2010 - A Model Practice
Morningstar Advisor - October/November 2010 - 21
Morningstar Advisor - October/November 2010 - Find the Right Fit
Morningstar Advisor - October/November 2010 - 23
Morningstar Advisor - October/November 2010 - 24
Morningstar Advisor - October/November 2010 - 25
Morningstar Advisor - October/November 2010 - Will REITs Put You in the Penthouse?
Morningstar Advisor - October/November 2010 - 27
Morningstar Advisor - October/November 2010 - 28
Morningstar Advisor - October/November 2010 - 29
Morningstar Advisor - October/November 2010 - 30
Morningstar Advisor - October/November 2010 - 31
Morningstar Advisor - October/November 2010 - Prepare for the Worst
Morningstar Advisor - October/November 2010 - 33
Morningstar Advisor - October/November 2010 - 34
Morningstar Advisor - October/November 2010 - 35
Morningstar Advisor - October/November 2010 - Tips for Common Family Situations
Morningstar Advisor - October/November 2010 - 37
Morningstar Advisor - October/November 2010 - Might Makes Right
Morningstar Advisor - October/November 2010 - 39
Morningstar Advisor - October/November 2010 - 40
Morningstar Advisor - October/November 2010 - 41
Morningstar Advisor - October/November 2010 - 42
Morningstar Advisor - October/November 2010 - 43
Morningstar Advisor - October/November 2010 - 44
Morningstar Advisor - October/November 2010 - 45
Morningstar Advisor - October/November 2010 - Built to Last
Morningstar Advisor - October/November 2010 - 47
Morningstar Advisor - October/November 2010 - 48
Morningstar Advisor - October/November 2010 - 49
Morningstar Advisor - October/November 2010 - Four Picks for the Present
Morningstar Advisor - October/November 2010 - 51
Morningstar Advisor - October/November 2010 - Tactical Strategies Miss Their Mark
Morningstar Advisor - October/November 2010 - 53
Morningstar Advisor - October/November 2010 - 54
Morningstar Advisor - October/November 2010 - 55
Morningstar Advisor - October/November 2010 - 56
Morningstar Advisor - October/November 2010 - 57
Morningstar Advisor - October/November 2010 - Time to Hop on the Commodities Bandwagon?
Morningstar Advisor - October/November 2010 - 59
Morningstar Advisor - October/November 2010 - 60
Morningstar Advisor - October/November 2010 - Retailers Balance Caution and Catalysts
Morningstar Advisor - October/November 2010 - 62
Morningstar Advisor - October/November 2010 - 63
Morningstar Advisor - October/November 2010 - 64
Morningstar Advisor - October/November 2010 - 65
Morningstar Advisor - October/November 2010 - In Search of … Recession Survivors
Morningstar Advisor - October/November 2010 - 67
Morningstar Advisor - October/November 2010 - Turmoil-Tested Small-Cap Funds
Morningstar Advisor - October/November 2010 - 69
Morningstar Advisor - October/November 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - October/November 2010 - 71
Morningstar Advisor - October/November 2010 - 72
Morningstar Advisor - October/November 2010 - 73
Morningstar Advisor - October/November 2010 - 50 Most Popular ETFs
Morningstar Advisor - October/November 2010 - 75
Morningstar Advisor - October/November 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - October/November 2010 - 77
Morningstar Advisor - October/November 2010 - VA Sales Rise in Second Quarter
Morningstar Advisor - October/November 2010 - 79
Morningstar Advisor - October/November 2010 - The Third Rail
Morningstar Advisor - October/November 2010 - Cover3
Morningstar Advisor - October/November 2010 - Cover4
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