A Fund's Value: Having Skin in the Game
Call the money management firm Jackson Park Capital and there’s a good chance one of its two fund managers — Greg Jackson or John Park — will pick up. These seasoned fund managers don't have a phalanx of executive assistants running interference for them. They do, however, have a part-time assistant in their office in Alpine, Utah, and that’s about it.
Jackson and Park, who started the new, value-oriented Oakseed Opportunity Fund, also have lots of experience. They both have 20-plus year pedigrees at some of the most well-respected money management firms — Yacktman and Oakmark Funds for Jackson and Acorn Funds for Park. Both also worked as co-chief investment officers of famed private equity shop Blum Capital. Some $10 million of the fund's $64 million is their own money, and the value-oriented investors aim to be its largest shareholder. Retail shares of the fund have an expense ratio of 1.41 percent, which will likely decline if more assets flow into the fund. Lewis Braham spoke with Greg Jackson.
Why do you want to be the fund's largest shareholders?
It comes down to our investment strategy with stocks. We look for companies with a shareholder-oriented management team. I want chief executive officers to have a lot of skin in the game by owning stock in their companies. You care a lot more if there’s skin in the game. By owning shares of the fund our interests are aligned with shareholders.
More than just ownership, we like to see strong insider buying of a company's stock and buying in the open market with cash, not acquiring shares through a stock option plan. Usually we want to see buying that's at least six figures in value.
Managers often run separate accounts for wealthy investors alongside their funds. You decided not to do that. Why?
We decided to have one client and one client only — our fund. John and I were blessed to make a bit of money so we don’t need the assets under management for our livelihood. The fund is designed [to hold] all of our money. We still have a sizable amount of money invested at Blum Capital because of its private equity structure. We'll put that money into our fund when those investments are liquidated.
You've noted that there can be conflicts of interest running multiple accounts and funds because some accounts may have higher fees, giving a manager an incentive to pay more attention to those accounts.
Exactly. And you know the manager can have a lot of his own money invested in one account and zero invested in another.
Do you think it’s odd that many other managers don't eat their own cooking?
If I were a shareholder that would give me pause. Why is the fund good enough for me but not good enough for them? In our case if we do poorly, we are doing poorly alongside everyone else.
Tell me about your investment strategy.
We have a global strategy that can invest in stocks of any size. Generally the businesses that we buy have high free cash flow, so what management teams do with that cash becomes paramount. There are really only five possible uses for it -- reinvesting in the core business, making acquisitions, buying back stock, paying down debt and paying a dividend.
Do you have a preference for any of those five?
It really depends. There's a book out now called "The Outliers," which profiles eight very successful CEOs. It talks about how redeploying cash flow is just as important as running the business correctly.
The kind of CEO we look for is one who would say, “Shares of my company are overvalued so the best thing to do is to make an acquisition with them as my currency.” By contrast, when the share price is really low relative to its underlying value, you want the CEO to buy back stock. I don’t want a CEO who tells me “I only buy back stock or I only make acquisitions.” I want them to be agnostic and say to themselves, “When my stock is cheap I buy it back and when it’s expensive I use it as currency.”
What rate of growth in free cash flow do you look for in a company?
Generally you want a business that is going to grow in the high single-digits and low double-digits, and with the dividend you are going to get a total return in the teens. Let’s take an example we own — Cisco Systems. Its business has a really nice return on invested capital, a high 20 percent, and its dividend yield is 2.9 percent. Its share price is so low, at $23.48, that its price-earnings ratio for 2013 is about 10.
Do you look for low debt as well?
Although we prefer conservative balance sheets, let’s take a look at one of our other holdings, SBA Communications. It own towers for cell phone companies. The company is highly leveraged but the cash flows are so stable it’s almost like a utility. Because of that stability it can afford to have a very high debt level.
Do you favor U.S. or foreign stocks now?
We’re about 15 percent international. We are completely agnostic on market-cap and country but we are tilting large-cap and tilting U.S. Given the stability of the U.S. economy and quality of the companies, U.S. companies look cheap relative to other countries where there's less stability, such as France.
What industries do you see value in?
Teva has a drug coming off patent in two years that makes up a large component of its earnings and people worry there’s going to be a giant step down [in its price]. We think the worst is baked into the stock. They have a decent drug pipeline if you look three years out. Everyone is ignoring that. It’s a similar story with AbbVie, which has a drug called Humira coming off patent in 2016. It has a price-earnings ratio of 12 and a 3.75 percent dividend yield.
Most global funds have large staffs visiting companies around the world. There are just two of you. How will that affect your fund?
Because we’ve invested for so long we’ve had a good look around the world and seen a lot of the companies we like. Do we have a team sitting in Singapore looking at companies? No. Do I know the companies I want to look at in Singapore? Yes. Could we be at a slight disadvantage? Maybe. But the stocks we are looking at are mega-caps worldwide that we know well.
Because of your long experience do you have contacts worldwide helping you with research?
We have deep networks. David Herro [manager of the $21 billion Oakmark International Fund] is one of my best friends in the world. I can talk international stocks with David anytime I want. David Samra and Dan O’Keefe at Artisan International Value are also good friends. Vodafone Group was one of the companies this fund owned when we started. Dan O’Keefe at Artisan and I talked for about three hours about that stock. I convinced Dan to buy it.
Do you invest in each other's funds?
David Herro has a $3 million investment in our fund. David Samra's also an investor. And I am an investor in their funds.
I guess you're all competing with each other, too.
We're all very competitive. We want to succeed, but we want them to succeed as well, just a little bit behind us.
(Lewis Braham is a freelance writer based in Pittsburgh.)
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