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How to Beat an Index: Invest Like a Business Owner

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“We’re not going to play the loser’s game,” David Rolfe, chief investment officer of St. Louis-based Wedgewood Partners, said upon being named an SMA Managers of the Year in April 2011. “Instead of trying to time the markets and getting sucked into short-term volatility, we take a long-term view and let the markets work for us. Too many of our competitors try to do otherwise, and we refuse to play that game. That, quite simply, is our investing philosophy. ”

Fast forward a year and some change, and not much is different. That adherence to their philosophy in good markets and bad is one reason for Rolfe’s success, and why he’s now celebrating his 20th year with Wedgewood.

“I stared with $10 million to $15 million in assets under management,” he recalled at the 2012 Morningstar Investment Conference in Chicago on Thursday. “Today we have $1.7 billion in AUM.”

The firm was founded by president Anthony Guerrerio in 1988, a few years before Rolfe joined. Its respect for index investing and investing as business owners “has led us to two aspects of our approach that are quite different than our competitors. To outperform an index, we believe that our portfolios must be constructed as different from an index as possible. Thinking and acting like business owners reduces our interest to those few businesses which are superior. Both of these views lead to our focused (concentrated) approach.”

“So far, our philosophy has worked through complete business cycles,” he said. “We don’t believe we have an informational advantage. We look for 20 good portfolio finds where the valuations make sense. In this way, clients don’t have to sacrifice growth to get value and vice versa.”

As for the current situation in Europe, economic issues here in the U.S. and everything else that’s happening, Rolfe wasn’t all that concerned, at least not from an investment standpoint.

“As the market climbs that classic wall of worry, it represents opportunity,” he said, “especially for a concentrated portfolio like ours.”

And concentrated it is, with only 20 companies allowed at any one time, a number which only 2% of all money managers are able to claim, he said.

“We’re not reinventing the wheel, and we’re certainly not going to add another stock to the portfolio just to satisfy some analyst. If we want to add a name then that forces a sale of an underperforming position. That’s what keeps us disciplined.”

He mentioned the philosophy of the legendary investor and Vanguard founder John Bogle that simplicity is key, because “the fewer decisions you make means any one decision is that much more impactful. And every one of our stocks has a high-impact focus. Over the 20 years that I’ve been here, we’ve had maybe 100 companies in the portfolio.”

Rolfe admitted that a possible “Achilles heel” to such a concentrated portfolio is that it’s “always one day away from an earnings disappointment.” But if he’s done his homework, he added, he won’t be surprised.


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