Quick Take: Robert Torray and Douglas Eby of Torray Fund (TORYX) believe the worst thing an investor can do is get caught up in momentary fads. While frothy rides such as the Internet craze may be fun for a while, Torray and Eby believe these passions inevitably fade, leaving long-term investors such as themselves ahead of the short-term traders.
The proof rests with the fund’s results. Begun in January 1991, the $1.8 billion Torray Fund is one of the best-performing large-cap value funds for the ten year period through March, gaining an annualized 16.5%, versus 12.0% for the average large-cap value fund. More recently, the fund rose 9.4% for the one-year period through March, while its peers were up an average of 2.6%.
Torray and Eby believe they’ve succeeded by identifying a concentrated group of all-weather stocks, such as Johnson & Johnson (JNJ) and Abbott Laboratories (ABT) and holding them in a low-turnover portfolio. Over the long haul, the managers figure that the market’s most sustained gains come from a limited number of companies with the best business fundamentals.
The Full Interview:
S&P: What is your investment approach?
EBY: We buy leading businesses at fair prices and hold them for long periods. Research has shown that a company’s stock price closely correlates over time with its business fundamentals. We keep our turnover to about 25% annually and our total holdings to 30 to 50 names, with the top ten making up about 40% of total assets.
Mutual funds often turn in mediocre results because of massive turnover and over-diversification. Owning too many stocks and paying too much in fees guarantees sub-par returns. You can make a ton of money with high short-term trading, but you do better in the long run with our strategy.
S&P: How do you handle companies that lose their leading positions over time?
TORRAY: We’ve made some mistakes. We’re constantly on the lookout for stellar companies that begin to tip over, but you’ll never completely eliminate that risk.
S&P: The fund tends to be more volatile than its peers.
TORRAY: Our volatility has been on the upside. We’ve made more money than 95% of our peers. We may own a stock like Bristol-Myers Squibb (BMY) that drops from the 50s to the 30s, but that doesn’t signal business risk. If you own 35 to 50 stocks for long periods, some volatility is likely.
S&P: How do you deal with volatile markets?
EBY: We like volatility — it’s a tremendous advantage, because promising investments surface during volatile periods. We look for very good businesses at fair prices, and the market knows which businesses those are. The prices on the best companies are usually high until something goes wrong. If it weren’t for volatile periods, we wouldn’t be able to invest in many of our holdings.
S&P: How did you react to the post-September 11 market?
TORRAY: We substantially changed the composition of the fund, pushing our turnover to about 40%. We sold all our defense contractors and bought companies threatened by the falloff in travel, including United Technologies (UTX), Honeywell International (HON), and American International Group (AIG).
There will be times when our turnover is virtually zero, since we’ve gone for two- to four-year periods before a sea change occurs. We’ve held a number of companies for over ten years.
S&P: Would you mention a few all-weather holdings?
EBY: Johnson & Johnson (JNJ) and Abbott Laboratories (ABT). Their stock prices are backed up by strong long-term products and solid fundamentals. The health-care industry has very favorable long-term winds at its back because of the aging population and higher health-care budgets around the world.
S&P: Some analysts think the large pharmaceutical companies don’t have enough new products in the pipeline to support their stock prices.
EBY: That’s a near-term problem leading to low stock multiples, but it creates tremendous buying opportunities. Over the long term, health-care stock prices are driven by the relative earnings of other sectors and political pressures, as well as blockbuster products.
S&P: What are your largest sectors?
EBY: Consumer discretionary, financial services, health care, and industrials make up about 80% of the fund. In consumer discretionary, we have several media, advertising, and entertainment companies, such as Hughes Electronics Corp. (GMH) , Interpublic Group Cos. (IPG), Clear Channel Communications (CCU), Gannett Co. (GCI), and Tribune Co. (TRB). These stocks had fallen because they are economically sensitive. Our industrial holdings include Illinois Tool Works (ITW), United Technologies (UTX), and Honeywell International.
S&P: To what factors do you attribute the fund’s strong long-term record?
TORRAY: Our companies have a far superior profile than the overall market. In the short run, stocks can sell off for any reason, but over decades, the companies with better businesses do better.
EBY: We also tend to avoid the big disasters. It’s important not to get caught up in fads. Invariably, something gets hot, and valuations get stretched. The best companies may be momentarily hurt by fads, but in the long run, they’ll perform the best. We’re willing to give up near-term relative performance to gain long-term results. For example, we could have beaten the S&P 500 in 1998 if we sold everything and bought JDS Uniphase Corp. (JDSU).
S&P: Do you avoid technology?
TORRAY: I’ve often said that technology is good for the economy but very bad for investors. Technology faces many of the investment drawbacks of innovative industries. Warren Buffett said the airlines industry has had a net cumulative loss since the Wright Brothers. New developments often lead to investor excitement, but rarely translate to profits, since innovative products frequently become commodities.
EBY: Most companies operate more efficiently today because of technology. As an investor, you’re better off buying the companies that are becoming more efficient and profitable as a result of innovations.