Sunday, March 29, 2009

WSJ: Mutual Fund Manager Donald Hodges Sees Decade Ruined - Hodges Fund (HDPMX)

Don Hodges is a mutual fund manager who I've been following with one eye for quite a few years - he runs Hodges Fund (HDPMX) ; we are similar in the "go anywhere" approach, and a quite concentrated portfolios - for his fund there are currently about 50 positions with a high asset concentration in the top 10 positions: >40%. I respect that approach rather than "being the market" (buying 200+ stocks and not being concentrated in anything) as most mutual funds are. Like most long only managers Mr. Hodges has had a very rough year in 2008 (-50%), and 2009 thus far has not been to kind either (-14% year to date). As the story in the Wall Street Journal says, assets have been obliterated down from $750M to $250M, from a combination of stock losses and then withdrawals.

Looking at his top positions at 12/31/08, 14% (top 2 positions) were in airlines Continental Airlines (CAL) and AMR Corp (AMR) and then a very heavy emphasis on energy in the bottom 5 of the top 10.

In the latest update, as of 2/28/08 which does not have weightings but shows top 25 positions we see a continued major emphasis on energy - Transocean (RIG), Chesapeake Energy (CHK), Exxon Mobil (XOM), Schlumberger (SLB), and still a sizable exposure to the airlines. Quite interesting because the market has been trading the 2 sectors against each other - when oil runs, usually airlines suffer and vice versa. Some quality names he owns outside of those groups are Flowserve (FLS), and Cummins Engine (CMI).

Here is the WSJ article and it definitely shows the human toll this market has taken on mutual fund managers. [Mar 12, 2009: First Pacific Advisors - Rob Rodriquez to take 1 Year Sabbatical]
  • For many years, Donald Hodges ran one of the top-rated stock-focused mutual funds in the country. He also has lost money for his investors over the past decade. A $10,000 investment in Hodges Fund made 10 years ago would be worth around $9,015 today, compared with $7,720 if it was invested in the Standard & Poor's 500-stock index. Years of stellar performance were wiped out by a 49.5% plunge in 2008, a much steeper fall than the S&P, and a 11% drop so far this year.
  • "You carry it with you every place you go because you have friends investing with you," says Mr. Hodges, a silver-haired, 74-year-old Dallas money manager, who also suffers because he has money in the fund. "I'm very much embarrassed by our performance last year."
  • Hodges Fund suffered in the last part of 2008 because of declines in the likes of offshore-drilling firm Transocean Inc., American Airlines parent AMR Corp. and Texas Industries Inc., maker of industrial materials like cement.
  • Mr. Hodges's son Craig, 45, joined as a co-manager 10 years ago. "Having to see him go through this in the twilight of his career is a little bit tough," he says
  • So, Mr. Hodges, who maintains a calm aura despite all, has found himself logging extra hours soothing clients. He has become more cautious in his new stock picks, leery about buying until he is sure they are unlikely to blow up. He also is working out more often at home with his treadmill and weights, trying to remain fit to tackle what lies ahead.
  • Mr. Hodges is emblematic of well-regarded fund managers with good track records who have been chastened in the short term. Of the 468 diversified U.S. stock funds that have had the same manager for 10 years through Feb. 28, 46% logged negative returns over this period, says fund tracker Morningstar Inc. In the same time, the S&P index has fallen an annualized 3.4%, including reinvested dividends.
  • Robert Hagstrom's Legg Mason Growth Trust (LMGTX) was in the top quarter among peers over the 10 years ended December 2007. But after a 60% slide in 2008, weighed down by bad bets in financial stocks, the fund is now among the worst performers in the growth category. Neuberger Berman Partners Fund (NPRTX), which lost 52% in 2008, is down an annualized 2.4% over 10 years through Feb. 28. Big stakes in energy, materials and industrial stocks fared poorly. "Our numbers were fantastic through June, and then we fell of the cliff massively," says manager Basu Mullick.
  • The "go-anywhere" Hodges Fund -- Donald Hodges invests in both value and growth issues, and ranges from small- to large-market capitalizations -- was founded in 1992 and rose to $750 million in assets by early last year. But now it is one-third that size, thanks to the brutal decline and outflows of around $31 million for the first two months of this year.
  • In three consecutive years through the end of 2007, the Hodges Fund won awards for having the best five-year performance in Lipper Inc.'s category of multicap core funds. Even now, Mr. Hodges frequently appears in the media.
  • In the first half of 2008, even as the broad market fell, Hodges Fund held up relatively better because it had few financials. In the summer, Mr. Hodges took time off for an investors' cruise to Asia. He received a daily update on the fund portfolios via faxes and emails.
  • But after the collapse of Lehman Brothers Holdings Inc. in September, several of his fund holdings were hit hard. Mr. Hodges figured it was a buying opportunity -- a strategy that had worked well for him coming out of the 1982 and 1987 market slumps. He bought some cheap shares that he thought would hold up.
  • In recent months, Mr. Hodges has been spending a lot more time on the phone with clients, at times simply letting them vent. Recently, a client called him and repeatedly mentioned how much money the fund had lost. Mr. Hodges didn't argue, and said instead: "I haven't done well. I'm sorry about that."
  • Mr. Hodges is fixated on turning around his fund. He is staying with holdings he thinks will rebound, such as oil-related stocks. "It becomes a question of proving yourself to yourself, and to your clients," he says. Still, he has become gun-shy about jumping into new stocks.

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