July 2023 IssueLong scroll reading

Fire-and-Forget Gone Wrong: The Rise of GoodHaven Fund

By David Snowball

In the military realm, “fire and forget” designates a weapon that you don’t need to think about once it’s been launched. In investing, “fire and forget” could be used to describe several sorts of mistakes centering on our impulse to look away once we’ve made a decision. One of those mistakes is to buy a fund (presumably for a good reason) then sell it (presumably for a good reason) and then never re-examine your decision.

Managers – both corporate and fund – make mistakes. You can’t avoid it. They can’t. The best of them realize it, learn from it, correct it and return to doing fine work. It might be that the folks at GoodHaven warrant the “the best of them” tag. And, I suspect, they warrant resumed attention.

GoodHaven Fund (GOODX) was launched in April 2011 by Larry Pitkowsky and Keith Trauner, two former associates of the iconoclastic Bruce Berkowitz, who manages Fairholme Fund. During their time at Fairholme, the guys rose from research analysts to portfolio managers, CIOs, and vice presidents. In 2010 they left Fairholme and about 12 months later launched their own fund. The fund had two good years, then a long stretch of lean ones. The managers lamented “frustratingly modest gains” in their 2017 Annual Report. In each of 2013, 2014, 2015, and 2017, they trailed more than 97% of their peers.

In the year that followed, they took a long hard look in the mirror and concluded that it wasn’t working. They concluded that they had been undercutting their own success, and their investors, with a series of misjudgments.

They resolved to change and do better. Those changes rolled out in late 2020 and resulted in what manager Pitkowsky calls GoodHaven 2.0. The central differences come down to five changes.

Goodhaven 1.0 Goodhaven 2.0  
Two guys One guy Keith left the team, but not the firm. They concluded that their styles were not meshing so that the whole looked distressingly less than the sum of its parts.
Macro calls about the states of markets and the direction of rates and such informed the portfolio construction Fundamental analysis drives the portfolio The most evident difference is that the fund’s traditional double-digit cash stake was quickly and substantially reduced. The fund is now fully invested.
Emphasis on special situations that weren’t that terribly “special.” Emphasis on quality names in the portfolio with only the “occasional really special situation.” Mr. Pitkowsky believes that the 1.0 portfolio wasted too many resources on stocks “in the messy middle.” That is, stocks that were neither high-quality names nor “real” distressed securities.
Visually, the portfolio has sort of moved from being tube-shaped (1.0) to barbell-shaped (2.0).
Emphasis on statistical measures of value Emphasis on cheap for what you’re getting By centering on a desire for high quality rather than a desire for cheap, the portfolio names became better and the manager worked to make rational assessments of future prospects. He was willing to buy growth-y names when the price was right.
Cut your losses. “Don’t sell the flowers and water the weeds,” buy if the only change has been the stock’s price The fund has a low turnover ratio, about 17%, which reflects a commitment to hold through price corrections if the firm’s underlying prospects are unchanged. Mr. Pitkowsky allows, “Doing nothing is much, much harder than doing something.”

By Morningstar’s assessment, GoodHaven’s portfolio is characterized by dramatically higher quality names with higher growth prospects than its peers. That has corresponded with a period of dramatic outperformance in terms of total returns, downside management and risk-adjusted returns.

Comparison of 3-Year Performance (Since 202006)

  APR Max drawdown Downside deviation Ulcer Index Sharpe ratio Sortino ratio Martin ratio
GoodHaven 20.0% -17.8 9.8 6.5 1.07 1.90 2.85
Multi-Cap Value peer group 12.9 -17.9 10.3 5.9 0.65 1.13 2.16
S&P 500 12.9 -23.9 11.4 9.8 0.65 1.01 1.18

Its recent strength – including a return in the first half of 2023 – has driven it to top 10% returns in its Morningstar peer group over the past three years.

Bottom line: GoodHaven is living up to its early promise. Funds are beginning to trickle back in, though it’s down dramatically from its peak. It would be wise for investors interested in quality-at-a-good-price to add GoodHaven to their due diligence list.

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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.