of course, the sub-advisor of the Profit Lomax Value Fund, having the responsibility of investing the money contained in the fund.
How good are Eley’s skills? A comparison with the S&P 500 as well as the competition is the best yardstick. In an industry where mere percentage points constitute a canyon, the Edgar Lomax company compiled a 23.1% annualized average return over the three-year period ended December 31, 1996, compared with 19.7% for the S&P 500. For five years, the margin widens with Eley posting a 20.4% five-year annualized average return, compared to the S&P 500′s gain of 15.2%. Set Eley’s record alongside mutual fund rivals–regardless of their style–and you’ll see gaps as well. According to statistics compiled by Morningstar, Eley’s three-year return surpasses just over 97% of the 2,212 equity mutual funds tracked regardless of investment style. For five years, Eley is ahead of a little over 96%
of the 1,244 funds tracked.
Looking over Eley’s shoulder to get a sense of what exactly draws him to a stock, you get a sense that investing is a lot easier than it appears. Eley’s fund is no different from the institutional accounts he’s run for the past 11 years. For one, the fund holds 25 to 35 stocks, a pittance compared to many mutual funds that horde up to 50 companies in their portfolio. Eley’s stocks seem familiar, if only because of their size and prominence in their respective industries. His largest holdings include household names such as General Motors, 3M, Exxon and AT&T. But as simple as it looks, Eley’s method is chock-full of lessons an individual investor would well heed.
For starters, he hates taking unnecessary risk almost as much as he hates frittering investors’ money away on frills. So when he scans the stock market’s high end–that is, the largest corporations, tracked primarily by the S&P 500 index–he looks for companies he can buy and hold for at least three years. Yes, fine-tuning is required on a periodic basis, but Eley avows that he can’t warm up to a stock unless it has long-term potential. It’s a strategic base that not only helps Eley glean the market for the best stocks around, it also minimizes trading costs that would eat into his total return over time.
That philosophy was tested just last August. A major holding of Eley’s, Philip Morris, a leading cigarette manufacturer and maker of Marlboros, started plummeting on news of litigation problems in the tobacco industry. Philip Morris took a hit. During the month, Eley saw the shares tumble steadily downward to $85.63 from $ 104.63. But as the investors fled Philip Morris in droves, Eley didn’t waiver. Instead, he saw a drop in Philip Morris’ stock price as the perfect opportunity to add to his stake. Over the next month, he snapped up almost 4,000 shares at a discount and watched them rebound nicely to $113 by year’s end, a 32% gain over the year’s low.
A second hurdle a stock must dear in Eley’s eyes is a