Voya Corporate Leaders Trust B (LEXCX), August 2012 update (originally published July 2011)

By Editor

At the time of publication, this fund was named ING Corporate Leaders Trust B.

Objective

The fund pursues long-term capital growth and income by investing in an equal number of shares of common stocks of a fixed-list of U.S. corporations.

Adviser

ING Funds. ING Funds is a subsidiary of ING Groep N.V. (ING Group), a Dutch financial institution offering banking, insurance and asset management to more than 75 million private, corporate and institutional clients in more than 50 countries. ING Funds has about $93 billion in assets under management.

Manager

None.

Management’s Stake in the Fund

None (see above).

Opening date

November 14, 1935.

Minimum investment

$1,000.

Expense ratio

0.49% on assets of $750 million.

Update

Our original analysis, posted July, 2011, appears just below this update.  Depending on your familiarity with the research on behavioral finance, you might choose to read or review that analysis first.

August, 2012

2011 returns: 12.25%, the top 1% of comparable funds2012 returns, through 7/30: 9.5%, top 40% of comparable funds  
Asset growth: about $200 million in 12 months, from $545 million.  The fund’s expense ratio dropped by 5 basis points.  
This is a great fund about which to write an article and a terrible fund about which to write a second article.  It’s got a fascinating story and a superlative record (good for story #1) but nothing ever changes (bad for story #2).  In the average year, it has a portfolio turnover rate of 0%.The fund (technically a “trust”) was launched in late 1935 after three years of a ferocious stock market rally.  The investors who created the trust picked America’s top 30 companies but purposefully excluded banks because, well, banks and bankers couldn’t be trusted.  Stocks could neither be added nor removed, ever, unless a stock violated certain conditions (it had to pay a dividend, be priced above $1 and so on), declared bankruptcy or was acquired by another firm.  If it was acquired, the acquiring firm took its place in the fund.  If a company split up or spun off divisions, the fund held both pieces.

By way of illustration, the original fund owned American Tobacco Company.  ATC was purchased in 1969 by American Brands, which then entered the fund.  American sold the tobacco division for cash and, in time, was renamed Fortune Brands.  In 2011, Fortune brands dissolved into two separate companies – Beam (maker of Jim Beam whiskey) and Fortune Brands Home & Security (which owns brands such as Moen and Master Lock) – and so LEXCX now owns shares of each.  As a Corporate Leaders shareholder, you now own liquor because you once owned tobacco.

Similarly, the fund originally owned the Atchison, Topeka & Santa Fe railroad, which became Santa Fe Railway which merged with Burlington Northern Santa Fe which was purchased by Berkshire Hathaway.  That evolution gave the fund its only current exposure to financial services.

The fund eliminated Citigroup in 2008 because Citi eliminated its dividend and Eastman Kodak in 2011 when its stock price fell below $1 as it wobbled toward bankruptcy.

And through it all, the ghost ship sails on with returns in the top 1-7% of its peer group for the past 1, 3, 5, 10 and 15 years.  It has outperformed all of the other surviving funds launched in the 1930s and turned $1,000 invested in 1940 (the fund’s earliest records were reportedly destroyed in a fire) to $2.2 million today.

The fund and a comment of mine were featured in Randall Smith,  “RecipeforSuccess,” Wall Street Journal, July 8 2012.  It’s worth looking at for the few nuggets there, though nothing major.  The fund, absent any comments of mine, was the focus of an in-depth Morningstar report, “Celebrating 75 Years of Sloth”  (2011) that’s well worth reading.

ING has a similarly named fund: ING Corporate Leaders 100 (IACLX).  It’s simply trading on the good name of the original fund.  Avoid it.

Comments

At last, a mutual fund for Pogo. Surely you remember Pogo, the first great philosopher of behavioral finance? Back in 1971, when many of today’s gurus of behavioral finance were still scheming to get a bigger allowance from mom, Pogo articulated the field’s central tenet: “We have met the enemy, and he is us.”

Thirty-seven years and three Nobel prizes later, behavioral economists still find themselves merely embellishing the Master’s words.  The late Peter L. Bernstein in Against the Gods states that the evidence “reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty.” James O’Shaughnessy, author of What Works on Wall Street, flatly declares, “Successful investing runs contrary to human nature. We make the simple complex, follow the crowd, fall in love with the story, let the emotions dictate decisions, buy and sell on tips and hunches, and approach each investment decision on a case-by-case basis, with no underlying consistency or strategy.”

The problem is that these mistakes haunt not just mere mortals like you and me. They describe the behavior of professional managers who, often enough, drive down returns with every move they make. Researchers have found that the simple expedient of freezing a mutual fund’s portfolio on January 1st would lead to higher returns than what the fund’s manager manages with accomplish with all of his or her trades. One solution to this problem is switching to index funds. The dark secret of many index funds is that they’re still actively managed by highly fallible investors, though in the case of index funds the investors masquerade as the index construction committee. The S&P 500, for example, is constructed by a secretive group at Standard & Poor’s that chooses to include and exclude companies based on subjective and in some cases arbitrary criteria. (Did you know Berkshire Hathaway with a market cap of $190 billion, wasn’t in the S&P 500 until 2010?) And, frankly, the S&P Index Committee’s stock-picking ability is pretty wretched. As with most such indexes, the stocks dropped from the S&P consistently outperform those added. William Hester, writing for the Hussman funds, noted:

… stocks removed from the S&P 500 [have] shown surprisingly strong returns, consistently outperforming the shares of companies that have been added to the index. Since the beginning of 1998, the median annualized return of all stocks deleted from the index and held from their removal date through March 15 of [2005] was 15.4 percent. The median annualized return of all stocks that were added to the index was 2.9 percent.

The ultimate solution, then, might be to get rid of the humans altogether: no manager, no index committee, nothing.

Which is precisely what the Corporate Leaders Trust did. The trust was created in November of 1935 when the Dow Jones Industrials Average was 140. The creators of the trust identified America’s 30 leading corporations, bought an equal number of shares in each, and then wrote the rules such that no one would ever be able to change the portfolio. In the following 76 years, no one has. The trust owns the same companies that it always has, except in the case of companies which went bankrupt, merged or spun-off (which explains why the number of portfolio companies is now 21). The fund owns Foot Locker because Foot Locker used to be Venator which used to be F. W. Woolworth & Co., one of the original 30. If Eastman Kodak simply collapses, the number will be 20. If it merges with another firm or is acquired the new firm will join the portfolio. The portfolio, as a result, typically has an annual turnover rate of zero.

Happily, the strategy seems to work.  It’s rare to be able to report a fund’s 50- or 75-year returns, knowing that no change in manager or strategy has occurred the entire time.  Since that time period isn’t particularly useful for most investors, we can focus on “short-term” results instead.

Relative to its domestic large value Morningstar peer group, as of June 2011, LEXCX is:

Over the past year In the top 1%
Over the past three years Top 23%
Over the past five years Top 3%
Over the past 10 years Top 2%
During the 2008 collapse Top 7%

 

During the 2000-02 meltdown, it lost about half as much as the S&P 500 did.  During the October 2007 – March 2009 meltdown, it loss about 20% less (though the absolute loss was still huge).

How does the ultimate in passive compare with gurus and trendy fund categories?

Over the past three, five and ten years, Berkshire Hathaway (BRK.A), the investment vehicle for the most famous investor of our time, Warren Buffett, also trails LEXCX.

Likewise, only one fund in Morningstar’s most-flexible stock category (world stock) has outperformed LEXCX over the past three, five and ten years.  That’s American Funds Smallcap World (SMCWX), a $23 billion behemoth with a sales load.

Among all large cap domestic equity funds, only six (Fairholme, Yacktman and Yacktman Focused, Amana Growth and Amana Income, and MassMutual Select Focused Value) out of 2130 have outperformed LEXCX over the same period.  To be clear, that includes only the 2130 domestic large caps that have been around at least 10 years.

Morningstar’s most-flexible fund category, multi-alternative strategies, encompasses the new generation of go-anywhere, do-anything, buy long/sell short funds.  On average, they charge 1.70% in expenses and have 200% annual turnover.  Over the past three years, precisely one (Direxion Spectrum Select Alternative SFHYX) of 22 has outperformed LEXCX.  I don’t go back further than three years because so few of the funds do.

Only 10 hedge-like mutual funds have better three year records than LEXCX and only three (the Direxion fund, Robeco Long/Short and TFS Market Neutral) have done better over both three and five years.

Both of the major fund raters – Morningstar (high return/below average risk) and Lipper (5 out of 5 scores for total return, consistency of returns, and capital preservation) – give it their highest overall rating (five stars and Lipper Leader, respectively).

Bottom Line

If you’re looking for consistency, predictability and utter disdain for human passions, Corporate Leaders is about as good as you’ll get. While it does have its drawbacks – its portfolio has been described as “weirdly unbalanced” because of its huge stake in energy and industrials – the fund makes an awfully strong candidate for investors looking for simple, low-cost exposure to American blue chip companies.

Fund website

ING Corporate Leaders Trust

2013 Q3 Report

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.