February 2020 IssueLong scroll reading

FAM Dividend Focus (FAMEX) Prior to 2019, this was FAM Equity-Income

By David Snowball

Objective and strategy

The strategy attempts to provide current income as well as long-term capital appreciation by investing primarily in stocks that pay dividends. The managers think of themselves as value investors and attempt to answer the question, “if I could buy the whole company at these prices, would I?” That means calculating its “true business worth” and comparing that to the current stock market cap. They attempt to remain fully invested in stocks and convertibles. They tend to buy mid-caps, though their willingness to let winners run means that the portfolio has a fair large-cap component. The portfolio is compact and relatively low turnover.

Adviser

Fenimore Asset Management. Fenimore was founded by the Putnam family in 1974 and is headquartered in Cobleskill, New York. The firm advises three mutual funds and the Private Fund (which appears to have no name other than “the Private Fund”), as well as a variety of separately managed accounts. The firm appears to be steadily growing and managing a transition to a new generation of senior leadership. The firm reports total assets of $3 billion (as of September 30, 2018) and Morningstar reports total mutual fund assets of $2 billion (as of December 31, 2019).

Manager

Paul C. Hogan and Thomas O. Putnam. Mr. Hogan joined the firm in 1996 and handles the day-to-day management of the portfolio. Mr. Putnam founded Fennimore and is listed as co-manager on each of the firm’s three funds, but has reduced his firm-wide role in the past year as part of a long-planned management transition. Both managers have served since inception.

Management’s stake in the fund

Each of the managers has invested over $1 million in the fund. Mr. Putnam is by far the fund’s largest shareholder, contributing 8.6% of its assets, per the most recent SAI. In addition, every member of the Board of Trustees has a substantial investment in the fund.

Active share

95.6. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. The “active share” research done by Martijn Cremers and Antti Petajisto finds that only 30% of U.S. fund assets are in funds that are reasonably independent of their benchmarks (80 or above) and only a tenth of assets go to highly active managers (90 or above).

FAMEX has an active share of 95.6, which reflects a very high degree of independence from the benchmark assigned by Morningstar, the iShares Russell Mid-Cap.

Opening date

April 1, 1996

Minimum investment

$500

Expense ratio

1.23% on assets of $454 million

Comments

If we were to write an article entitled, “The Best Fund You Aren’t Invested In,” there’s about a 50/50 chance that it would be an article about FAM Dividend Focus. That suspicion arises from the fact that FAM Dividend Focus has appeared in so many MFO articles on funds with exceptional, and exceptionally risk-aware, performance. Those include:

Learning from the fall fall,” April 2019. The market crashed in the fourth quarter of 2018, then recovered by the end of the first quarter of 2019 and we identified the ten funds (well, nine funds and an ETF) that had the best risk-adjusted performance during that mini-cycle. FAMEX is there.

Overachieving defenders: Your late-cycle shopping list,” August 2019. There are tensions between short- and long-term excellence, and between pure and risk-adjusted returns. We looked for equity-oriented funds on both the MFO Honor Roll (top 20% pure returns over 1, 3 and 5 years) and its Great Owls list (top 20% risk-adjusted returns for 3, 5, and 10 years), which has been for the whole market cycle. 1944 equity-oriented funds were old enough, only 13 – 0.06% – made the cut. FAMEX is there.

“We’re here because you’re looking for the best of the best of the best, sir!” January 2020. We identified the 10 best equity-oriented funds of the past decade based on each of three different downside measures. Downside deviation: FAMEX is #5 (of thousands). Downmarket deviation: #6. Bear market deviation: #5.

FAMEX is also a Great Owl. It’s an MFO Honor Roll fund. It has a five-star rating from Morningstar. Though Morningstar’s analysts stopped covering the fund in 2010 (the last analyst report forecast “middle of the pack” returns for 2010-20 which turned out to be “top 7% returns”), their machine-learning model assigns it a Silver rating. It is a Lipper Leader for every trailing period for total returns, consistency, and preservation of returns.

  Total return Consistent return Preservation
3 year 5 / 5 5 / 5 5 / 5
5 year 5 / 5 5 / 5 5 / 5
10 year 5 / 5 5 / 5 5 / 5
Overall 5 / 5 5 / 5 5 / 5

(ratings as of 12/31/2019)

In general, Lipper’s equity-income group is the home of many of the industry’s ETFs and funds with the best long-term risk-adjusted rewards. That seems to be driven by the fact that equity-income funds invest a lot in dividend-paying firms which are often less sexy, less volatile, more seasoned and more stable than average.

Here is the 20-year performance of FAMEX against a strong peer group.

  20-year equity-income group average FAMEX Rank
Total return 7.0% 9.7% #1 of 44 funds
Batting average 50 57 #2
36-month rolling average 7.5 8.9% #6
       
Sharpe ratio 0.40 0.61 #3
Sortino ratio 0.57 0.91 #3
Martin ratio 0.44 0.71 #5
Capture ratio 1.11 1.34 #2
       
Downside dev 9.7 8.9 #12
Bear market dev 11.1 7.9 #12
Down month dev 11.9 8.5 #12
       

Here’s how to read that chart. The fund has returned, on average, 9.7% annually over the past 20 years. That’s the best in its class. It beat its peer group in 57% of all months over the past 20 years, which we take as a measure of its consistency and which is #2 in its group. The 36-month rolling average looks at every 36 month period for the last 20 years and calculates the average return you might expect if you held the fund for three years; FAM averages 8.9% annually, measured over 205 36-month rolling periods.

The next four entries are risk-return measures. Martin is the most risk-averse of the three, then Sortino and then the widely used Sharpe ratio. In each case, it’s a top-five fund. Capture ratio simply divides the percentage of the market’s downside captured by the percentage of the upside captured. So if you fall 0.66% when the market falls 1.0%, you’ve got a downside capture of 0.66. If you rise 0.9 when it rises 1.0, you’re at 0.9 on the upside. 0.9 on the upside divided by 0.66 on the downside gives you a capture ratio of 1.36. In general, any capture ratio above 1.0 means you’re winning, and FAMEX is the second-best capture ratio in its group.

The final set of calculations show how the fund performed on three measures of downside performance: downside deviation which measures “day-t0-day” downside, down month deviation measures downside in any month where the market was even a little bit negative and bear month deviation measures performance when the market fell 3% or more. In each case, FAMEX was 12th of 44 funds.

What do they do?

Everything above answers the question, how do they do? The more fundamental question is “what do they do” since that explains both their performance and their potential relevance to your portfolio.

Here’s the secret strategy: “The Dividend Focus Fund invests primarily in dividend-paying, mid-cap companies that have a history of consistently growing their dividend over time.”

It’s a low turnover strategy where the managers have learned to let their winners run a bit, but where they’re also pretty quick to eliminate firms whose prospects have fallen.

Hmmm … typically 30-4o stocks. Almost all domiciled in the US. About three times likelier to have a defensible “wide moat” than the average fund in its Morningstar mid-cap peer group. Also better financial health, higher returns on capital, greater growth and stronger profits than its Morningstar peers.

Bottom Line

There’s a lot to like here. Three things stand out:

    1. a consistent and understandable investment discipline: it’s been 45 years of “buy stock in quality companies with strong financials run by superb management teams at prices below what we estimate the businesses are worth.”
    2. an extraordinarily stable management team: both guys have been on board since inception, 23 years ago.
    3. extraordinary levels of insider ownership: the research unequivocal, it’s really good when the manager’s money is invested alongside yours and it’s even better when his boss’s money is invested alongside yours. (It turns out that the prospect of losing your boss’s or your mother-in-law’s money wonderfully focuses the mind and instills prudence.) The ownership among members of the board of trustees is very high, which is rare.

That’s translated to exceptional returns, delivered by extra-ordinary consistency and exemplary caution. Given especially the rich and accessible writing provided by the adviser, conservative equity investors owe it to themselves to look closer.

Fund website

FAM Funds. It’s a very clean, well-designed website with a lot of approachable content. By “approachable,” I mean that it’s more about the people and the process than about providing reams of obscure stats and “mountain charts.” I’d commend, especially, Lewis Braham’s very fine piece from the December 4, 2019 issue of Barron’s, “This fund manager has beaten 99% of his peers. Here’s how he picks winning dividend stocks” as well as the firm’s 2019 year-end newsletter which walks through the firm’s evolution. There’s been a sort of generational change underway (Deb Pollard is president, John Fox is CIO, founder Thomas Putnam is easing back), but also slow and steady growth at the firm.

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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.