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 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.
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 June 30, 2012, the adviser had approximately $220 million in assets under management.
Richard P. Cook and J. Dowe Bynum. Messrs Cook and Bynum are the principals and founding partners of Cook & Bynum (are you surprised?) 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 $140 million in two other accounts.
Management’s Stake in the Fund
As of September 30, 2011, Mr. Cook had between $100,000 and $500,000 invested in the fund, and Mr. Bynum had over $500,000 invested. Between these investments and their investments in the firm’s private accounts, they have “substantially all of our investable net worth” in the firm’s investment vehicles.
July 1, 2009. The fund is modeled on a private accounts which the team has run since August 2001.
$5,000 for regular accounts and $1,000 for IRA accounts.
1.88%, after waivers, on assets of $82 million. There’s also a 2% redemption fee for shares held less than 60 days.
I can explain what Cook and Bynum do.
I can explain how they’ve done.
But I have no comfortable explanation for how they’ve done it.
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. Now in their mid 30s, they’re on the verge of their first Morningstar rating which might well be five stars.
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.
They are, on face, very much like dozens of other Buffett devotees in the fund world.
Their discipline led to the construction of a very distinctive portfolio. They’ve invested in just eight stocks (as of 3/31/12) and hold about 30% in cash. There are simply no surprises in the list:
% of Total Portfolio
|Wal-Mart Stores||WMT||General Merchandise Stores||
|Berkshire Hathaway||BRK/B||Diversified Companies||
|Arca Continental SAB||AC* MM||Soft Drink Bottling & Distribution||
|Coca-Cola||KO||Soft Drink Manufacturing||
|Procter & Gamble||PG||Household/Cosmetic Products Manufacturing||
|Kraft Foods||KFT||Snack Food Manufacturing||
|Tesco||TSCO||Supermarkets & Other Grocery Stores||
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 (70% 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 is 25%, which is quite, if not stunningly, low.
Their performance has, however, been excellent. Kiplinger’s (11/29/2011) reported on their long-term record: “Over the past ten years through October 31, 2011, a private account the duo have managed in the same way they manage the fund returned 8.7% annualized” which beat the S&P 500 by 6.4% per year. COBYX just passed its third anniversary with a bang: its returns are in the top 1-5% of its large blend peer group for the past month, quarter, YTD, year and three years. While the mutual fund trailed the vast majority of its peers in 2010, returning 11.8% versus 14.0% for its peers, that’s both very respectable and not unusual for a cash-heavy fund in a rallying market. In 2011 the fund finished in the top 1% of its peer group and it was in the top 3% through the first seven months of 2012.
More to the point, the fund has (since inception) substantially outperformed Mr. Buffett’s Berkshire-Hathaway (BRK.A). It is well ahead of other focus Buffettesque funds such as Tilson Focus (TILFX) and FAM Value (FAMVX) and while it has returns in the neighborhood of Tilson Dividend (TILDX), Yacktman (YACKX) and Yacktman Focused (YAFFX), it’s less volatile.
Having read about everything written by or about the fund and having spoken at length with David Hobbs, Cook & Bynum’s president, I’m still not sure why they do so well. What stands out from that conversation is the insane amount of fieldwork the managers do before initiating and while monitoring a position. By way of example, the fund invested in Wal-Mart de Mexico (Walmex) from 2007-2012. Their interest began while they were investigating another firm (Soriana), whose management idolized Walmex. “We visited Walmex’s management the following week in Mexico City and were blown away … Since then we have made hundreds of store visits to Walmex’s various formats as well as to Soriana’s and to those of other competitors…” They concluded that Walmex was “perhaps the finest large company in the world” and its stock was deeply discounted. They bought. The Walmex position “significantly outperformed our most optimistic expectation over the last six years,” with the stock rising high enough that it no longer trades at an adequate discount so they sold it.
In talking with Mr. Hobbs, it seems that a comparable research push is taking place in emerging Europe. While the team suspects that the Eurozone might collapse, such macro calls don’t drive their stock selection and so they’re pursuing a number of leads within the zone. Given their belief in a focused portfolio, Hobbs concluded “if we can find two or three good ideas, it’s been a good year.”
Potential investors need to cope with three concerns. First, a 1.88% expense ratio is high and is going to be an ongoing drag on returns. Second, their incessant travel carries risks. In psychology, the problem is summed up in the adage, “seek and ye shall find, whether it’s there or not.” In acoustical engineering, it’s addressed as the “signal-to-noise ratio.” If you were to spend three weeks of your life schlepping around central Europe, perusing every mini-mart from Bratislava to Bucharest, you’d experience tremendous internal pressure to conclude that you’d gained A Great Insight from all that effort. Third, it’s not always going to work. For all their care and skill, someone will slip Stupid Pills into their coffee one morning. It happened to Donald Yacktman, a phenomenally talented guy who trailed his peers badly for three consecutive years (2004-06). It happened to Bill Nygren whose Oakmark Select (OAKLX) crushed for a decade then trailed the pack, sometimes dramatically, for five consecutive years (2003-07). Over 30 years it happens repeatedly to Marty Whitman at Third Avenue Value (TAVFX). And it happened to a bunch of once-untouchable managers (Jim Oelschlager at White Oak Growth WOGSX, Auriana and Utsch at Kaufmann KAUFX, Ron Muhlenkamp at Muhlenkamp Fund MUHLX) whose former brilliance is now largely eclipsed. The best managers stumble and recover. The best focused portfolio managers stumble harder, and recover. The best shareholders stick with them.
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.
The Cook & Bynum Fund. 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.© 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.