By Robert Barker Mark Sellers, the stock-picker who drove a pair of demonstration portfolios to market-crushing performances, is quitting Morningstar to start his own investment partnership. As the Chicago investment-research firm's chief equities strategist, Sellers managed its Tortoise and Hare portfolios from their start in June, 2001.
Result? The value-oriented Tortoise has returned an annual average of 12% in three and a half years. The Hare, comprising growth stocks, returned an annual average of 4%. The Standard & Poor's 500-stock index returned just 0.6% in the same period. In 2004 through November, the Tortoise is up 9%, and the Hare 19%, while the index gained 7% (see BW Online, 6/23/04, "Wait for the Right Price").
$1 FOR 50 CENTS. Such performance is rare. Since inception, both portfolios beat more than 97% of comparable mutual funds tracked by Morningstar while suffering no more than average volatility. So the pressure will be on Sellers' successor, Morningstar's media-industry analyst Jonathan Schrader. He's set to take over the portfolios on Jan. 1, according to Morningstar's chief of securities analysis, Haywood Kelly. Schrader plans to follow the basic strategy Sellers had articulated -- that is, finding low-price stocks of outfits with major competitive advantages.
Morningstar, which has filed for an initial public offering with the Securities & Exchange Commission, has used the Tortoise and Hare's performance to help promote subscriptions to its newsletter, StockInvestor. Sales are up, according to Kelly, but Morningstar is not divulging by how much. A spokeswoman said she didn't think Sellers' resignation is important enough to the firm's revenue growth to merit an amendment to its stock-registration statement.
As for Sellers, he expects his new, Chicago-based partnership, Sellers Capital, to pursue the same strategy in a single fund, with one twist: It won't be limited to large-capitalization stocks, as are the Tortoise and the Hare, but will invest in mid-caps, small-caps, even micro-caps if they meet his criteria. "My goal always is to find dollar bills for 50 cents," he says. Right now, two of his favorite stocks are medical-device maker Boston Scientific (BSX) and title insurer First American Financial (FAF).
TOUGH CHALLENGE. Some of his notable winners in the past year have included Chicago Mercantile Exchange Holdings (CME) and Biogen Idec (BIIB). A big loser: online DVD purveyor Netflix (NFLX). Sellers says his new partnership's portfolio will be limited to 10 to 20 stocks at any given time. While he may occasionally sell stocks short, he expects shorting (a bet that a stock's price will fall) to be a rare maneuver "reserved for extreme situations."
Sellers, who is 36, says he's leaving Morningstar now because "everybody's got a certain time in their life when they decide what they want to do for the rest of their life, and I really want to run money, and Morningstar doesn't manage outside money."
The Tortoise and Hare portfolios, funded with $100,000 each by Morningstar, were designed only to showcase the firm's research prowess. If Sellers gathers the millions he hopes to manage in his new partnership -- the minimum investment he's requiring to join is $250,000 -- not only will the challenge of beating the market prove tougher but the stakes will also be higher. Barker is a senior writer for BusinessWeek in Melbourne Beach, Fla.