lbert Meyer, president and manager of the $8.9 million Mirzam Capital Appreciation Fund (MCAF; ticker: MIRZX), understands stock options and why companies give them to their senior executives, but he still despises them. Although Meyer knows that the use of incentive options cannot be completely avoided, he’s made it his goal as MCAF’s manager to only invest in those companies where stock options are minimal.
Even if a company fits every other item on Mirzam’s list of investment criteria. Even if it is a proven leader in its industry sector. Still, Meyer will not consider it for MCAF if it has a stock option overhang of more than 5%. A tough course to take, he admits, since there are so many great companies out there that don’t meet that standard, but ultimately, one that pays off, because Meyer is a firm believer that all stock options do at the end of the day is to bleed a company and put wealth that should go to shareholders into the hands of its executives.
“Some people think that we’re investing in obscure companies because of the approach we follow,” Meyer says, “but there is nothing obscure about the companies we own.”
On the contrary, since some of MCAF’s biggest holdings are top-performing global players like steel giant Arcelor Mittal, Colgate-Palmolive, and Norwegian oil concern Stat Oil. The fund has invested in companies like China Mobile and Israel’s Teva Pharmaceuticals, strong players with solid cashflows and great business potential, and it likes companies like Church & Dwight, Clorox, and Paychex (whose CEO, Meyer says, is paid less than his competitor yet “does better”), but it has also rejected names like General Mills, Dell, and Moody’s Investors Service, which despite their strong market positions, “are bad companies for shareholders” because they fork over far too many stock options to their executives.
“We are invested in companies that are large and own their markets and don’t pay stomach-churning compensations,” Meyer says.
Just Doing His Duty
Meyer believes it is his duty as a manager of everyday people’s money to stay away from those companies that favor their executives over their investors, because most investors have no idea how much of a company’s wealth is lost through stock options. Many companies sell stock to employees at a deep discount to bring in more cash instead of selling products or services to customers, Meyer says, and there are so many examples of companies in just about every sector where chief executives have taken their stock options and sold them in the market, and no one has benefited but these individuals themselves.
While index fund managers have to buy whatever names are listed on the particular index they follow and are therefore forced to invest in companies with excessive stock option practices, Meyer has the independence to weed through the entire universe of companies and to carefully cherry-pick those names where investors, rather than CEOs, stand to gain.
Meyer has championed this approach for the better part of his career, and he remains a proud crusader against improper corporate governance and corporate fraud. A former accounting professor at Spring Arbor University in Michigan and prior to that, assistant academic dean at the University of Natal in his native South Africa, Meyer is razor sharp when it comes to accounting rules and being able to sniff out accounting improprieties.
Meyer’s fellow South African Cliff Morris, founder and president of Mirzam Asset Management, brought Meyer on board to manage MCAF, which launched in 2007.
Currently, the fund is only invested in 60 stocks, but they are all names that have been selected by working through a very detailed qualitative and due diligence process.
The selection process begins with a close examination of …