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?