The Cook & Bynum Fund (COBYX), April 2013

By David Snowball

 

This is an update of the fund profile originally published in August 2012. You can find that profile here.

Objective and Strategy

COBYX pursues the long-term growth of capital.  They do that by assembling an exceedingly concentrated global stock portfolio.  The stocks in the portfolio must meet four criteria. 

  • Circle of Competence: they only invest in businesses “whose economics and future prospects” they can understand.
  • Business: they only invest in “wide moat” firms, those with sustainable competitive advantages.   
  • People: they only invest when they believe the management team is highly competent (perhaps even crafty) and trustworthy. 
  • Price: they only buy shares priced at a substantial discount – preferably 50% – to their estimate of the share’s true value.

Within those confines, they can invest pretty much anywhere and in any amount.

Adviser

Cook & Bynum Capital Management, LLC, an independent, employee-owned money management firm established in 2001.  The firm is headquartered in Birmingham, Alabama.  It manages COBYX and two other “pooled investment vehicles.”  As of March 2013, the adviser had approximately $250 million in assets under management.

Manager

Richard Cook and Dowe Bynum.  Messrs Cook and Bynum are the principals and founding partners of Cook & Bynum and have managed the fund since its inception. They have a combined 23 years of investment management experience. Mr. Cook previously managed individual accounts for Cook & Bynum Capital Management, which also served as a subadviser to Gullane Capital Partners. Prior to that, he worked for Tudor Investment Corp. in Greenwich, CT. Mr. Bynum also managed individual accounts for Cook & Bynum. Previously, he’d worked as an equity analyst at Goldman Sachs & Co. in New York.   They work alone and also manage around $150 million in two other accounts.

Management’s Stake in the Fund

As of September 30, 2012, Mr. Cook had between $100,000 and $500,000 invested in the fund, and Mr. Bynum has between $500,000 and $1,000,000 invested.  They also invest in their private account which has the same fee structure and approach as the mutual fund. They describe this as “substantially all of our liquid net worth.”

Opening date

July 1, 2009.  The fund is modeled on a private fund which the team has run since August 2001.

Minimum investment

$5,000 for regular accounts and $1,000 for IRA accounts.

Expense ratio

1.49%, after waivers, on assets of $104 million. Morningstar continues to report a higher expense ratio, one which fails to reflect Cook and Bynum’s recent fee waiver. There’s also a 2% redemption fee for shares held less than 60 days.

Comments

Messrs. Cook and Bynum are concentrated value investors in the tradition of Buffett and Munger. They’ve been investing since before they were teens and even tried to start a mutual fund with $200,000 in seed money while they were in college.  Within a few years after graduating college, they began managing money professionally, Cook with a hedge fund and Bynum at Goldman Sachs.  Now in their mid 30s, they’re managing a five star fund.

Their investment discipline seems straightforward: do what Warren would do. Focus on businesses and industries that you understand, invest only with world-class management teams, research intensely, wait for a good price, don’t over-diversify, and be willing to admit your mistakes.

Their discipline led to the construction of a very distinctive portfolio. They’ve invested in just seven stocks (as of 12/31/12) and hold about 34% in cash. There are simply no surprises in the list:

 

Business

% of portfolio

Date first purchased – the fund opened in 2009

Microsoft

Largest software company

16.6

12/2010

Wal-Mart Stores

Largest retailer

15.8

06/2010

Berkshire Hathaway Cl B

Buffet’s machine

11.4

09/2011

Arca Continental, S.A.B. de C.V.

Mexico Coca-Cola bottler/distributor

8.7

12/2010

Tesco PLC

U.K. grocer

5.7

06/2012

Procter & Gamble

Consumer products

4.8

12/2010

Coca-Cola

Soft drink manufacturer and distributor

4.4

12/2009

Since our first profile of the fund, one stock (Kraft) departed and no one was added.

American investors might be a bit unfamiliar with the fund’s two international holdings (Arca is a large Coca-Cola bottler serving Latin America and Tesco is the world’s third-largest retailer) but neither is “an undiscovered gem.”  

With so few stocks, there’s little diversification by sector (60% of the fund is “consumer defensive” stocks) or size (85% are mega-caps).  Both are residues of bottom-up stock picking (that is, the stocks which best met C&B’s criteria were consumer-oriented multinationals) and are of no concern to the managers who remain agnostic about such external benchmarks. The fund’s turnover ratio, which might range around 10-25%, is low but not stunningly low.

The managers have five real distinctions.

  1. The guys are willing to look stupid.   There are times, as now, when they can’t find stocks that meet their quality and valuation standards.  The rule for such situations is simply:  “When compelling opportunities do not exist, it is our obligation not to put capital at risk.”  They happily admit that other funds might well reap short-term gains by running with the pack, but you “have to be willing to look stupid.”  
  2. The guys are not willing to be stupid.   Richard and Dowe grew up together and are comfortable challenging each other.  Richard knows the limits of Dowe’s knowledge (and vice versa), “so we’re less likely to hold hands and go off the cliff together.”   In order to avoid that outcome, they spend a lot of time figuring out how not to be stupid.  They relegate some intriguing possibilities to the “too hard pile,” those businesses that might have a great story but whose business model or financials are simply too hard to forecast with sufficient confidence.  They think about common errors  (commitment bias, our ability to rationalize why we’re not going to stop doing something once we’ve started, chief among them) and have generated a set of really interesting tools to help contain them.  They maintain, for example, a list all of the reasons why they we don’t like their current holdings.  In advance of any purchase, they list all of the conditions under which they’d quickly sell (“if their star CEO leaves, we do too”) and keep that on top of their pile of papers concerning the stock.  
  3. They’re doing what they love.  Before starting Cook & Bynum (the company), both of the guys had high-visibility, highly-compensated positions in financial centers.  Richard worked for Tudor Investments in Stamford, CT, while Dowe was with Goldman, Sachs in New York.  The guys believe in a fundamental, value- and research-driven, stock-by-stock process.  What they were being paid to do (with Tudor’s macro event-driven hedge fund strategies for Richard) was about as far from what they most wanted as they could get. And so they quit, moved back to Alabama and set up their own shop to manage their own money and the investments of high net-worth individuals. They created Cook & Bynum (the fund) in response to an investor’s request for a product accessible to family and friends.    
  4. They do prodigious research without succumbing to the “gotta buy something” impulse.  While they spend the majority of their time in their offices, they’re also comfortable with spending two or three weeks at a time on the road. Their argument is that they’ve got to understand the entire ecosystem in which a firm operates – from the quality of its distribution network to the feelings of its customers – which they can only do first-hand. Nonetheless, they’ve been pretty good at resisting “deal momentum.”  They spent, for example, some three weeks traveling around Estonia, Poland and Hungary. Found nothing compelling.  Traveled Greece and Turkey and learned a lot, including how deeply dysfunctional the Greek economy is, but bought nothing.
  5. They’re willing to do what you won’t.   Most of us profess a buy low / buy the unloved / break from the herd / embrace our inner contrarian ethos. And most of us are deluded. Cook and Bynum seem rather less so: they’re holding cash now while others buy stocks after the market has doubled and profits margins hit records but in the depth of the 2008 meltdown they were buyers.  (They report having skipped Christmas presents in 2008 in order to have extra capital to invest.)  As the market bottomed in March 2009, the fund was down to 2% cash.

The fund’s risk-return profile has been outstanding.  At base, they have managed to produce almost all of the market’s upside with barely one-third of its downside.  They will surely lag when the stock market turns exuberant, as they have in the first quarter of 2013.  The fund returned 5.6% in the first quarter of 2013.  That’s a remarkably good performance (a) in absolute terms, (b) in relation to Morningstar’s index of highest-quality companies, the Wide Moat Focus 20, and (c) given a 34% cash stake.  It sucks relative to everything else. 

Here’s the key question: why would you care?  If the answer is, “I could have made more money elsewhere,” then I suppose you should go somewhere else.  The managers seem to be looking for two elusive commodities.  One is investments worth pursuing.  They are currently finding none.  The other is investing partners who share their passion for compelling investments and their willingness to let other investors charge off in a herd.  If you’re shaken by one quarter, or two or three, of weak relative performance, you shouldn’t be here. You should join the herd; they’re easy to find and reassuring in their mediocrity.

Bottom Line

It’s working.  Cook and Bynum might well be among the best.  They’re young.  The fund is small and nimble.  Their discipline makes great sense.  It’s not magic, but it has been very, very good and offers an intriguing alternative for investors concerned by lockstep correlations and watered-down portfolios.

Fund website

The Cook & BynumFund.  The C&B website was recently recognized as one of the two best small fund websites as part of the Observer’s “Best of the Web” feature.

Fact Sheet

© Mutual Fund Observer, 2013. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.
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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.