Milwaukee Managers Shun Fads to Post Top Returns

Albert Nicholas, the dean of Milwaukee money managers, has a theory why the mid-sized city best known for beer and bratwurst is home to so many top- performing mutual funds.

“We are not as influenced by fads and trends as people on the coasts,” said Nicholas, who has run the $1.7 billion Nicholas Fund since 1969. “We are very independent.”

Morningstar Inc. (MORN) in December named funds run by two Milwaukee firms -- Artisan Partners LP and Fiduciary Management Inc. -- as finalists for its domestic stock manager of the year. The $580 million FMI Focus Fund (FMIOX) beat 99 percent of rivals over the past 15 years, and eight more funds managed near Wisconsin’s largest city, including the $10.1 billion Wells Fargo Advantage Growth Fund (SGROX) and the $2.4 billion Heartland Value Plus Fund, outgained at least 94 percent of peers over the past 10 years.

By comparison, only seven mutual funds based and managed in Chicago, which has four times the population and five times as many funds, beat 94 percent of peers over 10 years, Morningstar data show. Results for funds managed in Chicago for firms based elsewhere can’t be tracked, the company said.

Many of Milwaukee’s money managers, who collectively oversee about $57 billion in assets spread across 61 mutual funds, offer an explanation similar to Nicholas’s for the city’s success: its isolation from centers of finance. Milwaukee is 733 miles (1,180 kilometers) from Wall Street and 89 miles from Chicago, according to Bloomberg maps.

‘Fewer Toys’

“I don’t have any neighbors who run hedge funds,” said Andrew Stephens, whose $5.4 billion Artisan Mid-Cap Fund (ARTMX) beat 99 percent of peers since its start in 1997. “No one is constantly talking stocks to me. I am happy here in my ignorance.”

Patrick English, FMI’s chief executive officer, said down- to-earth Midwesterners are less concerned about “the size of your house or boat” than their counterparts elsewhere. “It is easier to focus on research when there are fewer toys to manage,” he said in an e-mail.

Much of the city’s money-management community can trace its roots to Nicholas. Known as “Ab,” the 81-year-old Nicholas got his start at the University of Wisconsin in Madison, where he studied under Frank Graner, a dapper, chain-smoking professor of finance. At a time when investing was usually taught as a dry academic subject, Graner was an inspiring lecturer who emphasized stock-picking, Nicholas said.

‘The Pied Piper’

Ted Kellner, who started FMI, and William Nasgovitz, founder of Heartland Advisors Inc., both in Milwaukee, also studied under Graner.

“He was the pied piper of investment studies,” Nicholas said in a telephone interview.

In 1967 Nicholas started an investment firm with Richard Strong, another Wisconsin graduate. Seven years later, Strong created his own company, Strong Capital Management Inc., whose mutual funds were acquired in 2004 by Wells Fargo & Co. Kellner, who replaced Strong at Nicholas Co., founded FMI in 1980. In 1994, Carlene and Andrew Ziegler left Strong to set up Artisan Partners.

The University of Wisconsin link remains strong today. About 60 people who work for Milwaukee firms are graduates of the school’s Applied Security Analysis Program, which trains money managers, according to Brian Hellmer, its director.

Real-World Experience

Students in the master’s degree program get real-world experience by managing $53 million that comes from the university’s endowment and alumni donations, Hellmer said. Thomas Ognar, manager of the Wells Fargo Advantage Growth Fund, and Adam Peck, co-manager of the $2.4 billion Heartland Value Plus Fund (HRVIX), are both graduates of the program. Ognar’s fund beat 99 percent of rivals over the past 10 years and Peck’s beat 97 percent, Morningstar data show.

Source: Nicholas Company Inc via Bloomberg

Albert Nicholas, founder and chief executive officer of Nicholas Company Inc. Close

Albert Nicholas, founder and chief executive officer of Nicholas Company Inc.

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Source: Nicholas Company Inc via Bloomberg

Albert Nicholas, founder and chief executive officer of Nicholas Company Inc.

With a population of 595,000, Milwaukee is America’s 28th largest city, according to the 2010 U.S. census. In the mid-1960s, four Milwaukee brewers -- Blatz, Pabst, Schlitz and Miller -- were among the top 10 beer makers in the world, according to the Museum of Beer & Brewing. Miller, which is owned by London-based SABMiller Plc (SAB), is the only one still operating a brewery in Milwaukee today.

Harley-Davidson Inc., the biggest U.S. motorcycle maker, and Johnson Controls Inc., the largest U.S. auto supplier, are both based in Milwaukee.

‘Live Like Kings’

Most of the mutual fund companies are clustered along the shore of Lake Michigan in the city’s downtown, which features wide streets and little traffic. Money managers boast of their short commutes and affordable homes.

“Professionals can live like kings here compared to Boston and New York,” FMI’s English wrote in an e-mail. A median- priced single-family house in the Milwaukee metropolitan area cost $181,000 in the fourth quarter of 2011, according to the National Association of Realtors, compared with $325,000 in Boston and $363,000 in New York.

The climate may not be as big a draw. The average January temperature is 21 degrees Fahrenheit (-6 degrees Celsius) compared with 32 in New York.

The Milwaukee firms that run equity funds emphasize individual stock selection and their own research over seeking to ride macroeconomic trends.

“It is too risky to make big macro bets,” Wells Fargo’s Ognar said in an October interview.

Read 10-Ks

In that same interview, he described Apple Inc., his largest holding, as a cheap stock, even though it had recently hit a record price of more than $422 a share. Apple closed March 2 at $545.18 in New York trading.

FMI, which manages $12.5 billion, Heartland and Artisan all stress their bottom-up approach. In an interview in his firm’s Milwaukee office, Eric Colson, Artisan’s CEO, described his money managers as people “who like to sit in the corner and read 10-Ks.”

Artisan, with $65 billion in assets, including funds managed by teams in other cities and money in separate accounts, withdrew a planned initial public offering in December, citing market conditions. One of the company’s value investing teams, based in Atlanta, won Morningstar’s award for domestic stock manager of the year in 2011.

Heartland’s Nasgovitz called himself a disciple of Benjamin Graham, the legendary investor who was Warren Buffett’s professor at New York’s Columbia University. Like Graham, Nasgovitz looks for companies with little debt selling at a discount to their long-term value.

Bucking Trends

Heartland Value Plus attracted $770 million in 2011, according to Morningstar, bucking a trend that saw investors pull $135 billion last year from funds that buy U.S. stocks, according to data from the Investment Company Institute, a Washington-based trade association.

The $5.1 billion FMI Large Cap Fund (FMIHX), whose managers were also nominated for Morningstar’s top award for 2011, gained $791 million. Ognar’s Wells Fargo fund won deposits of $4.5 billion, which ranked it among the 20 most popular U.S. mutual funds, Morningstar data show.

On the bond side, Lyle Fitterer’s $2.7 billion Wells Fargo Advantage Municipal Bond Fund (SXFIX) beat 99 percent of rivals over the past 10 years, Morningstar data show. After the municipal market sold off in December 2010 following analyst Meredith Whitney’s prediction that there would be “hundreds of billions” of dollars of defaults, Fitterer said her forecast was off the mark.

‘Latest Sizzle’

“I am not saying there won’t be defaults,” Fitterer said in a January 2011 interview. “But I have a hard time getting to $10 billion, let alone $50 or $100 billion.”

Fitterer’s fund gained 10 percent last year as defaults totaled $2.6 billion, excluding tax-exempt debt in AMR Corp.’s bankruptcy, according to Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors.

The $754.7 million BMO Intermediate Tax-Free Fund (MITFX) beat 99 percent of competitors in the past five years, Morningstar data show. In December 2010, Bank of Montreal (BMO) agreed to buy Milwaukee-based Marshall & Ilsley Corp., the fund’s owner, for about $4.1 billion in stock.

The $1.4 billion Baird Core Plus Bond Fund (BCOIX), managed by Mary Ellen Stanek, beat 94 percent of rivals over 10 years. In 2008, her $1.2 billion Baird Intermediate Municipal Bond Fund (BMBIX) beat 99 percent of similar funds by sticking to higher-quality issues, she said.

“We are hard-working Midwesterners here,” Stanek, president of Baird Funds Inc., said in an interview. “We may not always have the latest sizzle, but that sizzle often doesn’t add value.”

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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