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Mcelvaine Annual Report out today


Evolveus
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Good stuff!  Interesting, it looks like Tim's had some redemptions in the last year...contrary indicator?!  Cheers!

 

I bring this up because you mention, on the Chou America thread, that Tim will always put his partners ahead of themselves.  Did Tim change his fee structure in 2007 or so?  His earlier fees look pretty high  For example, in 1999, his pre-fee return was 38.5%, but after fees was 29.5.  That's almost a 25% cut, and that's pretty consistent throughout all years up until 2007 (when it seems to change to a straight 1% management fee, which is what he describes in this report).  Contrast that to the Buffett/Parsad/Pabrai structure of 25% after a high-water mark.

 

Any thoughts?

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I bring this up because you mention, on the Chou America thread, that Tim will always put his partners ahead of themselves.  Did Tim change his fee structure in 2007 or so?  His earlier fees look pretty high  For example, in 1999, his pre-fee return was 38.5%, but after fees was 29.5.  That's almost a 25% cut, and that's pretty consistent throughout all years up until 2007 (when it seems to change to a straight 1% management fee, which is what he describes in this report).  Contrast that to the Buffett/Parsad/Pabrai structure of 25% after a high-water mark.

 

Any thoughts?

 

That's incorrect.  Tim has always had a 4/10ths of 1% management fee on each fund, and then an incentive fee over a hurdle of 25% for the Trust and 20% for the LP.  The hurdle being the average 90-day T-bill rate through the year.  That was always the fee structure until termination when both funds merged in 2007 to form the trust. 

 

The trust has really three share structures...A, B & F.  The management fee and incentive fees differ among them based on the hurdle (12% for the A's, 6% for the B's and 6% for the F's).  There is also a high watermark.  Cheers! 

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So since inception, his investors have netted about equal to an index of the largest 300 companies in Canada. What is so special about this value investor?

 

Scorpion, I think this is the general "what have you done lately" argument that even value investors love to throw out.  So three years ago, he was beating the market handily and three years later he's barely ahead.  Now if in another three years, he's handily beating the market again, does that change anything? 

 

It's the same thing with Mohnish.  Three years ago when he was destroying the market, investors were very keen on everything he was doing.  Credit crisis comes and it's now the old "what have you done lately?" 

 

Haven't board members here learned anything from what has happened at Fairfax over the last seven years?  Do you buy Fairfax at $600 when it is extremely overvalued and expect Prem to hit out of the park, or do you buy Fairfax at $57 when everyone says "what is so special about this value investor?"  Cheers!

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Over 14 years, the performance is the same as the market and volatility is not low...

So it is not what have you done for me lately.  This guy is just (after fees) no better than the market.

 

Canada has a wealth of great managers, and Tim is just not one of them.

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I think you have to look at more than past record to get an idea of future expectations.  You have to look at process and would you buy these securities for your own portfolio.  One item Tim has erred on has been allocation weighting which he has commented on and fixed.  If you look at his portfolio today, I think it is great.  Past performance is only indicative of future performance if you use the same strategies as in the past.  Tim has learned to stay away (or at least not highly weight) from too leveraged firms ( I had and still may have this issue myself) and his portfolio today looks different than the only produced the large losses.  I had the same issue in 2008 being down about 50% but changed some holdings in 2009 and ended up over 110%.  Tim has just changed a little later so I think he should recover also.  Just my 2 cents.

 

Packer

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Over 14 years, the performance is the same as the market and volatility is not low...

So it is not what have you done for me lately.  This guy is just (after fees) no better than the market.

 

Canada has a wealth of great managers, and Tim is just not one of them.

 

I can't see why this guy gets so much hype either. Yeah, he's a good investor (for himself) but if clients get virtually none of the difference, how can this guy justify working? Hopefully I'm just talking out of line, but long term results tend to speak for themselves. I'm assuming after taxes his returns would be less than the index since inception. He's had a few great years when the market was way overvalued. With that being said, he seems like a pretty nice guy from the interviews I've read/watched.

 

Packer, that makes some sense. However, you could also make the argument that past returns might be greater future returns based on the amount of capital. A million is a lot easier to manage than a billion (from what I've been told!).

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Over 14 years, the performance is the same as the market and volatility is not low...

So it is not what have you done for me lately.  This guy is just (after fees) no better than the market.

 

Canada has a wealth of great managers, and Tim is just not one of them.

 

I can't see why this guy gets so much hype either. Yeah, he's a good investor (for himself) but if clients get virtually none of the difference, how can this guy justify working? Hopefully I'm just talking out of line, but long term results tend to speak for themselves. I'm assuming after taxes his returns would be less than the index since inception. He's had a few great years when the market was way overvalued. With that being said, he seems like a pretty nice guy from the interviews I've read/watched.

 

Packer, that makes some sense. However, you could also make the argument that past returns might be greater future returns based on the amount of capital. A million is a lot easier to manage than a billion (from what I've been told!).

 

If you take your list of your so called great Cdn. managers today and then measure their performance 10 years later I am willing to bet a large amount of capital at decent odds that you would get a normal distribution of performance. Is this because these managers will have transformed from great to not so great managers as the Tim detractors are suggesting or because LUCK which is a large component of investment performance is a random variable. Mr Buffett has often credited LUCK for a large portion of his fortune, this is not just humility on his part.

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Yeah, he's a good investor (for himself) but if clients get virtually none of the difference, how can this guy justify working? 

 

That's a little harsh, don't you think?

 

I'm of the opinion that in buying funds, investors are better off using the same "buy low, sell high" mindset that often serves them well in buying individual stocks. Sometimes this means taking a (educated, hopefully) leap of faith and back managers with less-than-stellar recent results or little/no track record at all. That's not to say a guy who, for instance, put his money with Fairholme today will not do well; just that the odds is against his doing better than an early investor.

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Yeah, he's a good investor (for himself) but if clients get virtually none of the difference, how can this guy justify working?  

 

That's a little harsh, don't you think?

 

I'm of the opinion that in buying funds, investors are better off using the same "buy low, sell high" mindset that often serves them well in buying individual stocks. Sometimes this means taking a (educated, hopefully) leap of faith and back managers with less-than-stellar recent results or little/no track record at all. That's not to say a guy who, for instance, put his money with Fairholme today will not do well; just that the odds is against his doing better than an early investor.

 

Why is that harsh? Over a nearly 15 year period, including one that has been overly generous to value investors, he has underperformed the index after taxes in all likelihood. Yet, he is still takes his fee for his services.

 

We aren't talking about being "wrong" for a certain period of time, 3-5 or even 10 years. He's beaten the index after fees only 5 out of 14 years and the only real impressive ones were when the market was tanking. None of which have occurred in the past 7 years. I'd guess at that time he was managing fewer dollars.

 

Will he outperform after fees over the next decade? Probably before fees, yes. After fees, I'm not so sure. With that being said, he's still far from his highwater mark, so that is a boon to potential investors.

 

He's a smart guy and seems nice enough, so there is a shot he'll do better.  However, give his decently long track record, it's reasonable to have some doubts. With that being said, he's underperformed the market for so long, that his time might be due soon, too.

 

Alright, so I looked at his annual report back from 2007. The returns are certainly impressive. So, he is might very well be due for some type of turnaround. However, I can't say I would be comfortable investing with him for a long term time period.

 

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I think it's unreasonable to expect concentrated value investors to outperform in every single timeframe.  That's the nature of value investing - you're going to be out of step with the market at times.  

Look at Longleaf Partners, who are some of the most well-respected US mutual fund managers out there.  Their 2007-8 performance was terrible, and their long-term trailing returns reflected this. They've since recovered, and on a rolling basis they've done fantastically.

 

And for the people mentioning that McElvaine's only beaten the market in down years, remember that the Buffett's goal for his partnership was to match the index in up years and beat it in down years (not saying that McElvaine is Buffett, or that anyone else on the planet is).

 

 

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Guest Dazel

 

 

Tim will have his day...Fairfax would hire this guy in a second.

 

Those that know how he picks stocks (he is a CA-real deal) have seen how good he is

at restructuring. For anyone here to put themselves in Tim's shoes in 2008 you would have to be there. He was stuck in small illiquid stocks and there

were people literally jumping in front of trains...redemptions and no way out. I feel for him...

My thinking was that he was not only scared shitless he did not have the cash to do anything. Running your own business (investment counsellor) and picking

stocks are two different things. Running a small business is hard...for those that do not know..think about who he would have had to fire..and they all have their life

savings with him in the tank as well...that is what goes through the mind of a businessman. Tough to buy stocks at that time...although some of us did do it.

 

P.S his laregest holding is a gem. Glacier media. We bought it in 2004 at $2 sold it at $4 ( great money) and bought it again this year around $2...they are in the right place (western Canada) with great managment and great company fundamentals..if it stays here will continue to add.

so disclosure: postion in GVC on tsx.

 

Best of luck to Tim.

Dazel

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Nice answer Dazel!  You are absolutely correct.  Hamblin-Watsa would hire Tim in an instant.  Peter Cundill did!  Although it was after considerable badgering.  ;D

 

Incidentally, to tell you what this guy is like.  He emailed me today and said that all his critics on this board are correct.  I told him he was wrong, as most of you are, and time will prove me correct.  'Nuff said...let's revisit this post in three-five years! 

 

By the way, I remember alot of people telling me that Mike Pruitt would never close the Hooters deals at Chanticleer.  Guess what?  Good people are hard to find...good people with strong moral fibre are even more remote.  Cheers!

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Humm, I think that benchmarking Tim to the S&P/TSX Composite is likely a mistake.  Why?  Tim holds non-Canadian stocks.  Oh, and the S&P/TSX Composite is a crazily lopsided index anyway.   

 

(As a supplementary consideration, one might also want to remove the cash position to get a better sense of his stock picking ability.)

 

Mind you, I'm slowly coming to the view that benchmarking is largely a toxic mental model that seems to lead to silliness like style boxes and trailing four year itch where anything that has underperformed over the last four years should be ditched.  Problem is, nearly any good method will suffer from multi-year periods of underperformance.

 

 

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I agree.  If style boxes were the answer, then Morningstar would be hitting the ball out of the park.  These tools are primarily for those who don't as Marty Whitman (I think Ben Graham also) says have the "know how", therefore, are relying on diversification. And the best way to get diversification (if this is what you want to do) as Bogle and others have stated is a low-cost index fund.  You can also add a value tilt to this as Greenblatt and others do to add some additional value. 

 

I think the real way to determine if a manager is good and fits your style is to examine his largest holdings and see if they fit your investment style.  As for McElvaine, he has many securities I would hold (Glacier Media, Swiss Decaf Coffee Income Fund (love that name) and EGI Financial probably the cheapest auto insurer in NA today among others) so I would be attracted to this fund.  The same goes for the Chou Fund.  If you approach fund selection this way, I think you will have a focused list of buyers that fits your style the best.  Just my 2 cents.

 

Packer

 

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I can't say anything bad about the guy. I researched most of the names on it's portfolio before I even knew he existed. They were all close to the finish line. So I guess we have similar investing philosophies.

 

I would not invest in him or any fund because of the fees but I would certainly check out it's ideas :)

 

Sorry Tim, I'm a cheap bastard I prefer to keep the 1-2%.

 

BeerBaron

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I hope I am wrong about this guy (and I know I very well probably am). Like I said, he seems like a really nice guy. However, when one barely beats an index over 15 years in an environment ideal for value investors for much of that, it does question things. Yeah, he had a great track record before 2007...but so did a lot of other guys. With that being said, he's underperformed for so long, that he is due for a couple strong years.

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