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Entrepreneurs are often portrayed as go-getters, always looking for the latest idea and prepared at any time to jettison what doesn't seem to be working. But much of what makes a business successful is continuity, improving upon what has proved to work in the past. Entrepreneurs who feel this way will find kinship in the Homestead Value Fund, whose annual turnover of stocks has averaged an extraordinary 5 percent per year for the past five years. That compares with 70 percent for its peer group, midcap value funds.
This could be just a stubborn refusal to recognize mistakes--another trait business owners may be known for. But the fund has earned five stars, Morningstar's highest rating, for its mixture of good performance and low risk.
Homestead Value's share price has gone up 130 percent in the five years prior to June 30, putting it in the top 25 percent of funds of its type tracked by Lipper Analytical Services. Yet, Morningstar notes, it has lost only 70 percent as much as the average equity fund in down markets. From a risk standpoint, that record puts the fund in the top 20 percent of the "most docile" funds of its category.
Stuart E. Teach, Homestead Value's portfolio manager, watches over the companies his fund holds like a shepherd. "We like companies that are good at what they do and do it day after day," he says. He isn't looking for those with the highest growth rates or those with "whiz bang new products" or even those on an "acquisition binge." In effect, he wants to see the same continuity in their businesses that he has in his own. Because he is investing for the long term, he is usually in no hurry to buy and may spend six months or a year doing the research. Once he's found the right companies, however, he is prepared to make a significant commitment. Typically the portfolio contains stocks from only about 60 companies.
By definition, these are not wildly exciting companies. High rollers might find them dull, but not Teach. Take the Bemis Co., which manufactures packaging materials. Its products aren't elaborate, says Teach, but the company makes them cheaply and well enough to have become a market leader.
On the face of it, returns on companies that continue to do what they've done for years should produce unsurprising investment results, too. But Teach's record is based on his willingness to buy stocks when public opinion turns sour. Best of all, he likes companies he feels can come back to doing their own thing after a setback, such as Wendy's International Inc., which is much the same business it always was but is now opening hundreds of stores a year.
After he buys a company's stock, its volatility may not stop, but this is where Teach reckons his familiarity with his flock pays off. Having studied a company's prospects, a sudden rise in favorable press coverage doesn't send him chasing after more of it. On the other hand, when the price of one of his holdings drops sharply, he is able to sift through the flurry of rumors to the reality underneath. Consider this: Most of the stocks in the portfolio are the ones he started the fund with in 1990. In a period that includes one of the most dramatic increases in recent stock market history, that's quite an exercise in self-discipline.
As always, any stock-picking strategy can come unglued, and Morningstar's summation, "Investors in need of a strict value fund can hardly go wrong with this offering," shouldn't be taken literally. Still, in an industry where even lackluster funds attract billions of dollars, it's a surprise that one of this caliber should have less than $400 million in total assets.
At A Glance
Fund Name: Homestead Value Fund
Managed by: RE Advisors, Arlington, Virginia
Total assets: $360 million
One-year return: 35.1%
Five-year return: 19.8%
Annual return since inception on 11/19/90: 18.2%
Management Fee: 0.55%
Phone: (800) 258-3030
Figures are as of August 31, 1997
Reg Green edits Mutual Fund News Service, a mutual fund newsletter. The above opinions are those of te author and not of Entrepreneur. Past performance is no guarantee of future returns.