“Learning is not attained by chance, it must be sought for with ardor and attended to with diligence” – John Quincy Adams 

 Our core values at THOR can be summed up by the acronym “PKC” – Passion, Knowledge and Caring.  Knowledge is our biggest asset and we have a saying that gets mentioned often in the office – “even though you are on the right track, if you are standing still, you will get run over.”  We believe one of our key differentiators is our in-depth knowledge of mutual-fund managers.  Knowing this, we thought we would give you a brief synopsis of how we gather and use the information we acquire to research and select the mutual funds we invest in for our clients’ portfolios.  Jim, Andrew and Andy recently attended the annual Morningstar conference held Wednesday, June 18^th through Friday, June 20^th in Chicago.

The week of the conference, those three drove up on Tuesday afternoon to have dinner with representatives from a mutual fund we are considering adding to our approved fund list.  They spent two hours delving into the fund’s strategy, its personnel and the firm with an analyst and the president of the firm that operates the mutual fund.   The next morning, they had another two hour meeting with a fund group with whom we have money invested in both a US growth fund and an emerging market fund.  They met separately with the respective lead managers of both funds.  During these meetings, they not only obtained insights on the funds themselves, but other important information came to light as well.  For example, Steve, the co-manager of the emerging market fund, mentioned that according to their bottom-up research, emerging markets tend to do poorly when the future expected rate of return is below 10%.  It is currently above 15%.  Steve further elaborated that the expected rate of return for US stocks is now about 5-6%, according to his firm’s research.  This information reinforced our own research, which has led us to continue to add to the emerging markets allocation while adding a long/short fund to our US equity exposure.  Their next meeting was with a second emerging market fund that is complimentary to the fund we are invested in now.   This was a preliminary meeting with the lead fund manager and an analyst.  Based on that two hour meeting, THOR will perform a complete review of the fund over the next month or two to determine if it should be added to our list of approved funds.

After those meetings, the team headed to the conference.  The next two days were busy for the THOR crew.  The conference is designed with key note speakers and more intimate breakout sessions targeting different topics.  It is good to get perspective from industry leaders, especially those that are not on CNBC all the time.

The most interesting presentation of the conference was from Bill Gross of PIMCO Asset Management.  It was not interesting from a market standpoint, but was interesting from the standpoint of watching an iconic firm and manager collapse.  We have known PIMCO since the late 80’s.  In fact, PIMCO’s marketing head helped THOR create its first brochure.  We have from time to time purchased a PIMCO fund – a commodity fund and a foreign bond fund over a decade ago – and currently have a significant amount of fixed income investments with a group that left PIMCO in the 90’s.  If you read the article by MarketWatch on his speech, you would get the impression that he spoke about wisdom.  However, the speech came across as a company that is on the verge of collapse.  Last March, Mohamed El-Erian unexpectedly left as CIO of PIMCO in what apparently was a rift with Bill Gross.  Bill’s speech was fragmented, self-aggrandizing, long-winded and at times incomprehensible.  This was not only our belief, but the belief of many of the attendees with whom we spoke to at the conference.

We would not be surprised to learn of multiple withdrawals from PIMCO funds over the past two weeks from those advisors in attendance.    Unfortunately, in many 401K plans, PIMCO tends to be the only fixed income option available.  Please notify us immediately if additional fixed income funds are added as an option to your 401K plan.  The newer funds are probably a better alternative to PIMCO.

In addition to the presentations and breakout sessions at the conference, each of the team members was able to attend a dinner both Wednesday and Thursday with fund managers.  This is a unique opportunity to spend a couple of hours with the managers.  Four of the dinners were with funds we own, and the other two were new opportunities.  One of the new opportunities was with an established manager that just broke off on his own from a well established mutual fund company and the other was with a new fund started by a private equity firm.    Not only is the due diligence important when selecting a fund, the ongoing analysis of the team, strategy and firm is even more important.   Sometimes subtle shifts in approach and style will give us pause.   We saw that with PIMCO several years ago and it is why we have not made any investments in that fund group in over a decade.

The real gem of the conference is an exhibit hall that conference participants may walk through during breaks.  The exhibit hall had booths represented by more than 100 different mutual fund organizations.  Each of the team members was responsible for coming back with two sound investment ideas from the conference.  Many of those ideas come from meeting and talking to not only the fund marketing rep, but in some cases, the managers of the funds themselves.  Here are some of the investment ideas the team members discovered while at the conference:

–          A micro-cap manager that Mark and Jim met over a decade ago that we both liked.   However, the manager had no ownership and truly no supporting team.  He now has bought the firm, built up a good analyst team and has shared ownership with his team.

–          A growth team that broke off from a well established mutual fund company that is owned by the investment team.

–          A company that helps establish new boutique mutual funds.  In most cases, these are managers that are well established with good performance records.  We will be looking for a gem or two from their current roster.

–          Another 4-5 funds that for one reason or another we thought were worth considering.  Most of those ideas were generated by talking directly to the managers.

Once again, knowledge is one of our resolute values at THOR and a conference like this affords us the opportunity to gain that knowledge first hand.  Anyone can get facts and figures about an investment.  The real key is to kick the tires, ask pertinent questions – it still amazes us when we ask someone that has been marketing a fund for several years a question they can’t answer – and evaluate responses.  In the corporate world, almost all CEO’s are coached and trained on how to present and answer questions.  That is not the case with mutual fund managers.  By asking the right questions and using our experience, we can filter out the best managers in the world and gain a competitive advantage.