A fund manager is born.
Suppose you decided to quit your job and start a mutual fund tomorrow and, as a bonus, you were granted a few wishes. Of course, you'd want an all-star money manager to run things, preferably one who's earned his or her share of kudos, right? You'd probably ask for a stock market that's galloping to the heavens. And you'd pray that investors' money pour into mutual funds at a torrential pace.
That's exactly what Eugene Profit got last November when his Profit Lomax Value Fund opened shop. A financial consultant turned mutual fund director, Profit lured Randall R. Eley in as his chief investment officer in time for the launch of what is now the nation's 12th African American mutual fund. As a money manager, Eley has led his investing category for three years with an average annual return of 23.6%. It's a record that has won him appearances on PBS's Nightly Business Report, and even prompted Wall Street Week's Louis Rukeyser to gushingly dub him, "the finest investment manager you've never heard of." And for a crowning touch, Profit's venture set off just as the Dow Jones industrial average had topped the 6400 mark and investors were drenching mutual funds in some $223 billion in new money.
So what exactly does Profit do to celebrate? He dashes around, day after day, practically door to door, selling his fund--even on weekends when he wishes he could kick back with his wife and daughter. One morning, he's conducting a conference call to woo nine members of an investment club in Piscataway, New Jersey. Another day, he's fielding a barrage of probing questions from Links club members in Montgomery County. During the Christmas season, the 32-year-old Profit tirelessly worked the eggnog circuit. He lectured Yuletide gathering after gathering on stocks, bonds, portfolios and, most importantly, his brainchild, the mutual fund. Never mixing business with social pursuits, Profit passed up spreads of ham and sweet potatoes, promptly exiting the minute he finished his presentation. "I've got business to do," says Profit matter-of-factly. "Those aren't settings where I'm going to get up and dance because you never know how seriously they'll take you after that."
The sacrifices don't end on the dance floor. Take one Saturday in early January. A freakishly warm afternoon in Washington is coaxing the mercury up past 65 degrees, summoning almost all of the capital from its pre-Inaugural slumber. Profit, meanwhile, is breaking a sweat indoors. His hosts, a buppie couple, are putting him through the paces, demanding to know why they should invest in his fund and not one of the darling mutual funds they've so often seen touted in financial magazines. "Sometimes it's hard, but when you get down to it, all I have to do is point out Randall's track record before even mentioning that this is an African American mutual fund," boasts Profit.
Just as he is making headway, it's dinner time and the sturdily built 5-foot-10-inch former cornerback for the New England Patriots and Washington Redskins begins to fidget as the mouth-watering aroma of greens and steak waft from the kitchen to the living room. It's a night when Profit feels he's doomed to become the first former professional athlete to turn down a home-cooked meal. He looks at his watch, frowns, and bids adieu. With a turn of the ignition, he's off racing across D.C.'s suburban sprawl in search of another thousand dollars or so in new business. His next customer, a retired brigadier general, happens to be a family friend who's considering shifting his assets around. Unfortunately, Profit's in for a long discourse that will last well into the evening, a task that the carry-out pizza on the general's menu doesn't make any easier.
So goes the business of selling a brand new mutual fund. Any breather Profit gets from managing investments for individual clients is taken up in an elongated exercise in guerrilla marketing to one investor at a time. His competitors--the teams of managers and executives at the Fidelity Magellans, Vanguards and Putnams--needn't go through such paces. Big-fund companies, called complexes, have extensive networks of brokers and sundry pitchmen. Directors at the mammoth funds probably spend weekends lounging, roughhousing with the kids or toying with an automated putter. Meanwhile, Profit is busy conducting a one-man grassroots campaign in the name of Eley's investment prowess. "That's the beauty of a lot of smaller, newer funds," says Don Phillips, president of Morningstar, the mutual fund research firm. As an observer of the mutual fund industry, Phillips says the large complexes simply don't offer the personalized service that Profit's new outfit does. "Too often, you'll find that a number of uninspired funds come into existence because a big corporation decides it has a hole to fill and then shifts money into a new unit. It's better to see that someone with a unique way of managing money can go out and create a fund to showcase that ability."
As personable as Profit's approach seems, he's probably in for his share of hard work for the next few years. That's regardless of whether Randall Eley, who's managing the fund's money, continues to trounce the competition in his investment category. (Eley has produced a 5.6% gain since the fund's inception in November, with Profit Lomax's net asset value at $10.56 a share as of mid January, up from a $10 initial price.) In part, new funds are slaves to the press and must wait their turn for ink. No matter how good their track records, notoriety often comes only three years after inception once a firm like Morningstar weighs with its first rating. Until then, new funds run only as far as enthusiasm can carry them.
The rewards for patience, however, can be well worth the cold calls and sales pitches sealed in handshakes. Mutual funds enjoy fat profit high as 30%-40% at the bigger companies in the industry. Start-up costs--such as legal fees, licensing fees, initial contributions and the outlay required to research the stocks and sundry investments--remain constant whether the fund has $1 million or $10 billion in assets. Reaching maximum efficiency, however, requires a good deal of capital--experts say $100 million or more in assets. As of mid-January, Profit Lomax had amassed between $500,000 and $750,000. That's not a shabby amount, but far from pay dirt, considering the fund doesn't charge investors load fees and is therefore forced to eat expenses until it reaches a profitable mark.
A bull market sure helps new funds like Profit Lomax bide time. Hordes of individual investors have turned to mutual funds to save for everything from retirement and tuition to the downpayment on a new home. A fabulous two-year run in the stock market has its downside, though. During the most recent boom, the number of mutual funds elbowing one another for investment dollars has mushroomed from 3,427 in 1990 to 6,270 today. Fund competition is stiff. "The survival rate for new funds is well over 90%, I'd say, but that speaks to the bull market we've been in," says Morningstar's Phillips. "It'll be interesting to see how they do if the market goes sour." Opening its doors after so strong a run by the market begs the question of whether Profit Lomax has come along at the tail end of the party.
Stormy going could be near, says Randall Eley, who monitors the stock market's pulse and keeps the mutual fund profitably invested. Eley's jovial countenance, square-framed glasses and warm demeanor give him a calming appearance even as he talks of tough times. He feels corporate earnings gains that were up 9% in 1996 should shrink somewhat this year to the 4%-6% range. Such a scenario might frighten investors since the stock market is relatively overvalued, according to Eley. "We see a correction of as much as 20% by year's end," he cautions, "but as value managers, our job is not to time the markets, it's to find the best investments in the market." True to his word, Eley's record suggests his investment strategies are practically bear-proof. As an institutional investor, he neatly side-stepped the crash of 1987 and the mini-crash of '89, liquidating part of his stake in the market, and reinvesting shortly after the downfall.
A "value" manager by training, Eley's methodology is to steer Profit Lomax's money into companies that look undervalued, and to hold those shares until the stock market has rewarded that stake with a higher price. It's a bet that often requires a wait of months, if not years. Eley never strays outside large cap companies, the stalwarts of industry like the Goliath AT&Ts, General Motors, and Boeings. These stocks tend to be steady, dominate the S&P 500 and boast millions of shareholders. The "large cap" designation is derived by multiplying their price by the number of shares outstanding and then comparing that figure to the broad market.
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It's a school of investing that is often bypassed by thrill seekers, and the press as well. Large cap value managers can't spout on about fabulous technology companies they're wagering will harness whizzing electron streams or splice DNA molecules. High-profile mutual fund managers, like Michael Price of Mutual Shares, can grab headlines as he did by purchasing an outsized share of Chase Manhattan and prying management to consider a merger. Eley, though, can't resort to histrionics or swashbuckling antics to make his investments appreciate. Instead, his gains are anchored on time-tested criteria he's developed and will use again and again to scour the stock market, looking for bargains. The result is a record that managers of growth, value, small-, medium- and large-company funds would die for.
FRUGALITY AS A VIRTUE
If Randall Eley and his staff of seven were ever to choose a mascot to embody both his style and investment credo, it'd be the weather-beaten, burgundy Chrysler LeBaron their boss ambled about in for nearly 10 years. The modest chariot, which begged for a trip to Earl Scheib and sported nearly 200,000 miles, chauffeured Eley from meetings with clients to home and back. For the first few years of 1 institutional investing firm, the Edgar Lomax company, the car was the closest thing he had to a luxury. Its replacement was a tad flashier--an eight-year-old Ford Mustang, that his evoked snickers whenever Eley's colleagues wanted to rib him.
Eley's frugality, though something of a joke around the office, has become a point of pride for the 45-year-old Virginia native. "I'll tell you that the minute you walk into the offices of some institutional investors and see the lavish art and paintings they've hung on the wall, you'd think you were in a museum," he chortles, leaning back in a leather chair in a modest, but comfortable office 15 minutes south of Capitol Hill. Eley's modest ways have a purpose, he says: enhancement of share-holder value by keeping costs down. In the first few years, Eley refused a salary. Instead, the family--himself, his wife and four kids--was pushed to live off his savings. Even as the assets he managed grew to the millions of dollars, it wasn't unusual to spot him on a public bus shuttling back and forth to the local library to research stocks and make photocopies. And if stories of stoic penny-pinching don't inspire you, Eley's beginnings in investing sound like the stuff of folktales.
A precocious teen, Eley, the second in a family of five, won his mother's confidence and became, in effect, her financial administrator, managing everything from the bills to her investments in money market funds. "She trusted me fully, and I worked so I'd never disappoint her," he reminisces. Having developed a keen eye for the financial world, Eley acquired a taste for more sophisticated investments once he enrolled as an undergraduate in Yale in the late '70s. He devoured any magazine article or book that helped decipher the stock market and started schooling himself in the art of choosing stocks. "I came up with the idea that we could pool money and create an investment trust for all the family," Eley recalls. And in serving as the chief investment guide for his family's investment club, he got to know the market.
Tracing the foundation of Eley's education reads like a value-investing Hall of Fame. Foremost are his favorite volumes on stock analysis written by financial gurus Benjamin Graham, David Dodd and Warren Buffett. Eley's favorite readings included works that drove home the analysis of companies on a statistical basis to find shares that were intrinsically worth more than their share price. While in college and law school, Eley continued boning up, occasionally researching investments as sophisticated as commodities. After graduating from Yale in 1974, and law school at the University of Chicago, Eley took a job as a bond lawyer for the Omaha firm of Kutak Rock.
His interest in the stock market remained keen. "Word got around Kutak that Eley had a knack for choosing companies, and soon everyone in the firm would stop by his office and pick his mind on the market," says Raymond McGaugh, who met Eley at Kutak and began his own private tutorial. "He'd always give you books to read, and have a comment or opinion on every facet of investing." McGaugh, who joined the company full time as vice president of finance in 1995, wasn't alone. Soon, partners at the firm established a trust and approached Eley to invest the funds they had gathered. "People knew I was making consistent gains with my method, and so they called on me to lend my expertise." No doubt, Eley's skills helped him rise through the ranks of Kutak, earning him a promotion to a partner at the firm in less than four years. "It's at that moment I knew managing money was the life for me," he recalls.
To get started on a new career path, Eley again turned to extended family for seed money and support. He enlisted his four siblings and mother as his first clients and expanded from there. To thank his mother, Eley dubbed his new venture the Edgar Lomax Co. after his maternal grandfather. Although Eley never knew his grandfather, he had learned from family lore that Lomax was a shrewd investor in his time, who, along with Eley's mother, acquired real estate and managed rental properties. Edgar Lomax may have died shortly before Eley's mother was born, but the man manages to live on in Eley's work in other more mysterious ways. "We get calls all the time for Edgar Lomax, and one outside investment professional has even told his clients he could set up an interview," laughs McGaugh. A more fitting tribute to Lomax, however, is Eley's impressive track record. Since he started the firm in 1986, Eley has seen assets under management mushroom, today amounting to about $470 million in funds for institutional clients, such as pension programs for the cities of Baltimore, Washington, D.C., and Los Angeles, the state of Florida as well as corporate clients including Essence Magazine, Ameritech and Marriott International. The Edgar Lomax Co. is, of course, the sub-advisor of the Profit Lomax Value Fund, having the responsibility of investing the money contained in the fund.
How good are Eley's skills? A comparison with the S&P 500 as well as the competition is the best yardstick. In an industry where mere percentage points constitute a canyon, the Edgar Lomax company compiled a 23.1% annualized average return over the three-year period ended December 31, 1996, compared with 19.7% for the S&P 500. For five years, the margin widens with Eley posting a 20.4% five-year annualized average return, compared to the S&P 500's gain of 15.2%. Set Eley's record alongside mutual fund rivals--regardless of their style--and you'll see gaps as well. According to statistics compiled by Morningstar, Eley's three-year return surpasses just over 97% of the 2,212 equity mutual funds tracked regardless of investment style. For five years, Eley is ahead of a little over 96% of the 1,244 funds tracked.
Looking over Eley's shoulder to get a sense of what exactly draws him to a stock, you get a sense that investing is a lot easier than it appears. Eley's fund is no different from the institutional accounts he's run for the past 11 years. For one, the fund holds 25 to 35 stocks, a pittance compared to many mutual funds that horde up to 50 companies in their portfolio. Eley's stocks seem familiar, if only because of their size and prominence in their respective industries. His largest holdings include household names such as General Motors, 3M, Exxon and AT&T. But as simple as it looks, Eley's method is chock-full of lessons an individual investor would well heed.
For starters, he hates taking unnecessary risk almost as much as he hates frittering investors' money away on frills. So when he scans the stock market's high end--that is, the largest corporations, tracked primarily by the S&P 500 index--he looks for companies he can buy and hold for at least three years. Yes, fine-tuning is required on a periodic basis, but Eley avows that he can't warm up to a stock unless it has long-term potential. It's a strategic base that not only helps Eley glean the market for the best stocks around, it also minimizes trading costs that would eat into his total return over time.
That philosophy was tested just last August. A major holding of Eley's, Philip Morris, a leading cigarette manufacturer and maker of Marlboros, started plum-meting on news of litigation problems in the tobacco industry. Philip Morris took a hit. During the month, Eley saw the shares tumble steadily downward to $85.63 from $104.63. But as the investors fled Philip Morris in droves, Eley didn't waiver. Instead, he saw a drop in Philip Morris' stock price as the perfect opportunity to add to his stake. Over the next month, he snapped up almost 4,000 shares at a discount and watched them rebound nicely to $113 by year's end, a 32% gain over the year's low.
A second hurdle a stock must clear in Eley's eyes is a solid dividend record, one that shows a company willing to maintain regular payouts to shareholders. Of course, dividend increases are even better. Preferably, though, Eley's choice will pay a dividend that exceeds the S&P 500 average, currently a bit under 2%. "You want the sense that management feels business is not only good, but has good prospects going forward, and this is certainly one way of seeing that," he says. That's a rule that was certainly on his mind when Eley picked up AT&T late in 1996. Ma Bell may have had a turbulent year (see "Ma Bell Goes to War," Moneywise, March 1997). What Eley saw, nevertheless, was a stock with a solid dividend record, and a 3.2% yield to cushion his fund in case AT&T's restructuring took a long time to boost earnings.
Mulling over price/earnings ratios gives Eley an idea of just how the stock market has thrown itself at a stock or neglected it altogether, and how much of a premium the investing world has tied to a company's profits. A high ratio relative to the S&P 500 and to the company's industry, no matter how good business is, might make Eley think twice about adding a stock to his portfolio. And, a discount to the S&P 500 and other competitors might signal a bargain to be had. Debt levels are another consideration that Eley examines, a figure that's as easy as reading a company's balance sheet. "We don't want an investment's total debt level to be significantly above 45% because, as we know, money paid to creditors is cash that could be better spent on day-to-day operations or increasing shareholder value," he reasons.
Following Profit Lomax's game plan, you get a sense of just what's happened to the stock market over the last year, and what bets major players might be making. Lomax's largest industrial position is in energy stocks, where oil producers Chevron and Exxon constitute holdings that make up almost 10% of his portfolio. Eley looks for energy companies to weather any downfall in earnings over the next year, a feat he feels will help boost their performance. One favorite in the oil sector is Chevron, which Eley has held since 1991, when he bought in at $34.50 a share. Chevron's 3.2% dividend is higher than the S&P 500 average of 2%, and with oil prices stabilizing and U.S. consumption rising, it's one stake Profit Lomax should see rise, according to Eley.
PROFIT KEEPS ROLLING
It's a steady hand like Eley's that set Eugene Profit to dreaming when the two first met a little over a year ago. While networking at a seminar thrown by Washington, D.C., broker Lenda Washington, Profit and Eley crossed paths and immediately plugged into their Yale ties--Profit, having graduated from the Ivy League school in the mid-'80s. Profit's long-term goals had centered on tapping into the retail investing market, what professionals tend to call financial goods and services ear-marked for individual investors. The minute they met, Profit knew a mutual fund with Eley at the helm now seemed like the perfect product. "Randall's an orator, and the minute he starts talking about stocks, the room, no matter how many people are around, stands still," Profit says. One instance where Eley's public speaking skills came to play was at a Memorial Day barbecue Profit organized to put Eley and potential investors in contact. Mid-afternoon, Eley began talking over his investment background and views with a few African American doctors Profit had targeted for venture capital. But what had been set up as a private chat soon drew an audience. "It was like the old E.F. Hutton commercials, Randall started talking and people stood still--others started crowding the room," says Michael Simmons, who runs publicity for the fund.
With that kind of captivating persona leading Profit Lomax, and solid results to sell the fund, Eugene Profit's sales excursions should get easier over time. "He's real gungho and has boundless energy," says Eley. "And I can appreciate what he's going through because that's exactly whet I had to do when I started off."
A minimum investment of $2,500 is required to invest in the Profit Lomax Value Fund (888-335-6629). The minimum investment for an individual retirement account is $1,000.
RELATED ARTICLE: Randall R. Eley:
Education: Yale University (B.A. 1974) University of Chicago Law School (J.D. 1977)
Professional experience: Bond lawyer, Kutak Rock law firm, Omaha, Nebraska, 1974-86.
Current: President, chief investment officer and chairman of the board of the Edgar Lomax Co., Springfield, Virginia, since 1986; married, four children
RELATED ARTICLE: Eugene A. Profit:
Education: Yale University (B.A. 1986)
Professional experience: Cornerback, National Football League, New England Patriots and Washington Redskins, 1986-91; Credit analyst, Chase Manhattan Bank, New York City, 1986; Investment executive, Legg Mason Wood Walker, 1994-96
Current: Investor Resources Group, Chevy Chase, Maryland, founder and manager, 1996; Profit Funds Investment Trust, president, married, one child
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|Title Annotation:||Randall Eley|
|Author:||Anderson, James A.|
|Date:||Apr 1, 1997|
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