Tocqueville Select Fund (TSELX), January 2012

By Editor

Objective and Strategy

Tocqueville Select Fund pursues long-term capital appreciation by investing in a focused group of primarily small and mid-sized U.S. stocks. The portfolio, as of 9/30/11, is at the high end of its target of 12 to 25 stocks.  The managers pursue a bottom-up value approach, with special delight in “special situations” (that is, companies left for dead by other investors).  The fund can hedge its market exposure, but cannot short.  It can invest in fixed-income instruments, but seems mostly to hold stocks and cash.   Cash holdings are substantial, often 10 – 30% of the portfolio.

Adviser

Tocqueville Asset Management, which “has been managing private fortunes for more than 30 years.”  They serve as advisor to six Tocqueville funds, including the two former Delafield funds. The Advisor has been in the public asset management business since 1990 and. as of January, 2011, had more than $10.8 billion in assets under management.

Managers

J. Dennis Delafield, Vincent Sellecchia, and Donald Wang.  Mr. Delafield founded Delafield Asset Management in 1980 which became affiliated with Reich & Tang Asset Management in 1991. He and his team joined Tocqueville in 2009.  Mr. Sellecchia worked with Delafield at Reich & Tang and Delafield.  He and Delafield have co-managed The Delafield Fund since 1993. Mr. Wang seems to be the junior partner (though likely a talented one), having served as an analyst on The Delafield Fund and with Lindner funds.  Mr. Sellechia was the first manager (1998) of the partnership on which this fund is based, Mr. Wang came on board in 2003 and Mr. Delafield in 2005.

Management’s Stake in the Fund

Messrs Delafield and Sellecchia have each invested between $100,000 – 500,000 in Select and over $1 million in Delafield.   As of last report, Mr. Wang hadn’t joined the party.  Half of the fund’s trustees (4 of 8) have investments in the fund.

Opening date

Good question!  Select is the mutual fund successor to a private partnership, the Reich & Tang Concentrated Portfolio L.P.  The partnership opened on July 31, 1998.  On September 28 2008, it became Delafield Select Fund (a series of Natixis Funds Trust II) and one year later, it became The Select Fund (a series of The Tocqueville Trust).  This is to say, it’s a 13-year-old portfolio with a three-year record.

Minimum investment

$1000 for regular accounts, $250 for IRAs

Expense ratio

1.4% on $102 million in assets.  Assets jumped from $60 million to $100 million in the months after Morningstar, in September 2011, released its first rating for the fund. There’s also a 2% redemption fee on shares held under 120 days.

Comments

Have you ever thought about how cool it would be if Will Danoff ran a small fund again, rather than the hauling around $80 billion in Contrafund assets?  Or if Joel Tillinghast were freed of the $33 billion that Low-Priced Stock carries?  In short, if you had a brilliant manager suddenly free to do bold things with manageable piles of cash?  If so, you grasp the argument for The Select Fund.

Tocqueville Select Fund is the down-sized, ramped-up version of The Delafield Fund (DEFIX).  The two funds have the same management team, the same discipline and portfolios with many similarities.  Both have very large cash stakes, about the same distribution of stocks by size and valuation, about the same international exposure, and so on.  Both value firms with good management teams and lots of free cash flow, but both make their money off “financially troubled” firms. The difference is that Select is (1) smaller, (2) more concentrated and (3) a bit more aggressive.

All of which is a very good thing for modestly aggressive equity investors.  Delafield is a great fund, which garners only a tiny fraction of the interest it warrants.  Morningstar analysis Michael Breen, in September 2010, compared Delafield to the best mid-cap value funds (Artisan, Perkins, Vanguard) and concluded that Delafield was decisively better.

Its 11.4% annual gain for the past decade is the best in its category by a wide margin, and its 15-year return is nearly as good. And a look at upside and downside capture ratios shows this fund is the only one in the group that greatly outperformed the Russell Mid Cap Value Index in up and down periods the past 10 years.

Delafield Select was ever better.  Over the ten years ending 12/29/2011, the Select Portfolio would have turned $10,000 into $27,800 returned 14.5% while an investment in its benchmark, the Russell 2000, would have grown to $17,200.  Note that 70% of that performance occurred as a limited partnership, though the partnership’s fees were adjusted to make the performance comparable to what Select might have charged over that period.

That strong performance, however, has continued since the fund’s launch.  $10,000 invested at the fund’s inception would now be worth $13,200; the benchmark return for the same period would be $11,100.

The fund has also substantially outperformed its $1.3 billion sibling Delafield Fund, both from the inception of the partnership and from inception of the mutual fund.

The red flag is volatility.  The fund has four distinctive characteristics which would make it challenging as a significant portion of your portfolio:

  1. It’s very concentrated for a small cap fund, it might hold as few as a dozen stocks and even its high end (25-30 stocks) is very, very low.
  2. It looks for companies which are in trouble but which the managers believe will right themselves.
  3. It invests a lot in microcap stocks: about 30% at its last portfolio report.
  4. It invests a lot in a few sectors: the portfolio is constructed company by company, so it’s possible for some sectors (materials, as of late 2011) to be overweighted by 600% while there’s no exposure at all to another six half sectors.

It’s not surprising that the fund is volatile: Morningstar ranks is as “above average” in risk.  What is surprising is that it’s not more volatile; by Morningstar’s measurement, its “downside capture” has been comparable to its average small-value peer while its upside has been substantially greater.

Bottom Line

This is not the only instance where a star manager converted a successful partnership into a mutual fund, and the process has not always been successful.   Baron Partners (BPTRX) started life as a private partnership and as the ramped-up version of Baron Growth (BGRFX), but has decisively trailed its milder sibling since its launch as a fund.  That said, the Delafield team seem to have successfully managed the transition and interest in the fund bounced in September 2011, when it earned its first Morningstar rating.  Investors drawn by the prospects of seeing what Delafield and company can do with a bit more freedom and only 5% of the assets might find this a compelling choice for a small slice of a diversified portfolio.

Fund website

Tocqueville Select Fund

Fact Sheet

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