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New Captains for the Clipper Fund

By Aaron Pressman The board of directors of the $7 billion Clipper Fund (CFIMX) shocked the mutual-fund industry by deciding Nov. 30 to hire new managers. In the 65-year history of funds, boards have tossed out incumbent managers only a handful of times. But boards find themselves under increased scrutiny following the fund-trading and sales scandals uncovered by New York Attorney General Elliot Spitzer and the Securities & Exchange Commission. The move by Clipper's board, which also included a big cut in management fees, is a sign of things to come, say analysts and fund attorneys.

"There's a changed culture in the boardroom," says Mercer Bullard, a law professor at the University of Mississippi and president of Fund Democracy, a shareholder advocacy group. In the wake of the scandals, the SEC adopted new rules to promote board independence and put a greater focus on fund fees (see BW Online, 12/01/03, "The Critical Battle for Fund Reform"). The Clipper Fund board's moves "show a real independence of judgment," says Bullard.

"VERY UNCONVENTIONAL STYLE." Starting next year, the Clipper Fund will be run by Christopher Davis and Kenneth Feinberg, who have run up a stellar record at the Davis New York Venture Fund (NYVTX), beating 96% of similar funds over the past 10 years, according to Morningstar. Clipper also has an outstanding 10-year record, beating 98% of its peers, but it has stumbled this year. Year to date, Clipper has lost 1% through Nov. 29, while Davis' fund has gained 11% (see BW Online, 6/27/05, "Now the Real Value Is in Growth").

Clipper's board chose Davis over Pacific Financial Research, the current manager and an affiliate of Old Mutual. Pacific was handicapped because James Gipson, the current manager who founded Clipper in 1984, and several members of his team announced they were quitting the firm at yearend. Gipson founded Pacific Financial back in 1980 but sold it to United Asset Management in 1997. UAM itself was acquired by Old Mutual in 2000.

The board decided that Davis' investment style of concentrating on a relatively small number of undervalued stocks was most similar to Gipson's, according to Michael Glazer, an attorney for the independent directors. "Jim Gipson had a very unconventional style. The board's feeling was this is what shareholders bought, and we want to replicate that style as clearly as we can," he said. Davis' offer to cut the funds-management fee, from 1% of assets to a sliding scale of no more than 0.65%, also helped, as did his and Feinberg's offer to invest $50 million of their own money alongside that of shareholders.

NO BIG WAVE. Old Mutual's counteroffer was to fold the Gipson-less Pacific Financial into another of its value-oriented managers, Barrow, Hanley, Mewhinney & Strauss. But Barrow Hanley wasn't comfortable continuing with Clipper's concentration in fewer than 25 stocks, says a person familiar with the board's search. "We appreciate the consideration given to this decision by the Clipper Fund directors," Scott Powers, chief executive of Old Mutual Asset Management, said in a statement. The firm did get the $1 billion assignment to run the Clipper Focus Fund (PBFOX).

The SEC's new rules to promote board independence didn't directly figure into the decision. People unaffiliated with the fund company accounted for more than three-quarters of the fund's board well before the SEC adopted that requirement. The only non-independent member was Gipson himself, who served as chairman, but the board was replacing him based on his resignation from Pacific Financial.

Investors should not expect a huge wave of management changes across the industry. The Clipper situation was unusual since Gipson and other top managers were leaving the existing management company. That prompted the board to conduct a wider search.

FEE BREAKS? "There's no doubt that how directors approach this sort of thing has been impacted by what has happened over the past several years," says board attorney Glazer. "But this was a pretty unusual situation."

Changing managers during ordinary contract renewals, absent major personnel changes, is likely to remain rare, says law professor Bullard. Instead, emboldened fund boards may view the fee cuts at Clipper as the more useful road map. "There's a more reasonable chance to negotiate lower fees," Bullard says. And that would be a worthy achievement for shareholders after all the scandals they've seen.

Pressman is a correspondent in BusinessWeek's Boston bureau

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