All eyes on Clipper
NEW YORK – The Clipper Fund built itself into an industry legend on the strength of its management team. At the end of 2005, they departed abruptly. What happens to a 23-stock fund once the stock pickers who built it leave?
Clipper, founded in 1984 by James H. Gipson, has an enviable record. A $10,000 investment in Clipper when it was founded would have grown to $199,346 by the end of 2005, outgrowing the same investment in the Standard & Poor’s 500 (with dividend reinvestment) during the same period by a cool $60,484.
Clipper’s hallmarks under Gipson and his team were a small number of carefully selected stocks, a load of cash if there was nothing they wanted to buy and low turnover in the portfolio. That often meant Clipper made big bets on big companies. At the end of 2005, for instance, the fund had 10.4 percent of its holdings in Freddie Mac and 6.3 percent in American Express Co.
The strategy resulted in some years of remarkable gains and some years in the doldrums. The Freddie Mac investment, for instance, helped drag down Clipper’s returns. In 2005, the final year the fund was managed by Gipson and his colleagues, Clipper lost 0.24 percent. In contrast, the S&P 500 had a 4.91 percent return for the year.
That October, Gipson, then 63, and the rest of his team announced they would retire from managing Clipper. Investors had already started bailing out. Don Phillips, managing director of mutual fund tracker Morningstar Inc., told Fortune magazine that he and his wife were selling. “Time to Clip Clipper,” advised Kiplinger.com.
Finding a replacement was tricky. After all, buy-and-hold value investors are a rare breed. Clipper’s board picked Christopher C. Davis and Kenneth C. Feinberg of Davis Selected Advisors L.P. to manage the fund, effective January.
Since taking over Clipper, Davis and Feinberg have sold off many of the fund’s holdings, bought their own picks and laid out a plan. While the two say much will stay the same, they promise a couple interesting changes.
The fund turned over roughly 53 percent of its portfolio in the months after Davis and Feinberg took over, but Davis said the rate of turnover would slow and the fund’s holding period would be between three to 10 years for most investments. He said Clipper would be managed as a concentrated fund, holding positions in 15 to 25 companies on average.
Like their predecessors, the two have focused on a small number of holdings. As of March 31, the fund held 22 stocks, almost all of them large caps. Unlike their predecessors, Davis and Feinberg are not sitting on cash: roughly 95 percent of the fund’s $3.5 billion was invested in equities as of the end of March.
The biggest change may be the new managers’ fee structure. Davis has reduced the fee substantially, setting up a sliding scale that starts at 0.65 for the first $500 million of net assets in the fund and gets lower. He has promised to waive all fees in excess of 0.50 for 2006.