| James McGlynn |
The fund's assets, currently at about $70 million, are flat, mostly due to McGlynn's losing battle to hold on to them upon his arrival, he says. "It got assets from another fund," he explains, "but, because the prior management has such a bad reputation, I was just doing my best to keep the assets in there." The fund's low profile didn't help; McGlynn notes that the Carillon offering relied on the sales force of the firm's parent, Union Central Life Insurance, to garner new money. Salesmen, however, aren't stupid, and were reluctant to steer their clients to what they viewed as a bad investment. That history, coupled with what McGlynn calls "kind of a vanilla name" in Summit, made gathering assets something like running up a fast-moving down escalator. It's only recently, with the fund's five-year anniversary and the fact that, more and more, "people have forgotten the prior management," that investors are warming to the Everest Fund.
Indeed, with one big exception, McGlynn's record at Everest has been better than average. The fund has posted double-digit returns three out of the five years. In 2002, it was hammered to the tune of -23.8%, and last year, it only returned 6.8%, missing it's benchmark, the Russell 1000 Value Index, which returned just over 7%. Still it topped both the Standard & Poor's 500 Index and its Morningstar category average. Morningstar has awarded the fund four stars, based on it's "above average" returns, placing it in the top 15% of large-cap value offerings. It also boasts an expense ratio 40 basis points below its category average.
McGlynn would be the first to call his approach conservative. "We're not market-timers," he says, nor does he "time the economy" by making bets on broad sectors, categorizing the fund as sector-neutral to the benchmark. Rather than placing his bets on the economy as a whole, McGlynn focuses on finding value within each sector, overweighting and underweighting subsectors as part of a strategy known as subsector rotation.
"Say, for example, that consumer discretionary is 10% [in the benchmark], we might be 10% as well, but we won't be sprinkled in some subsectors, such as real estate or casinos," he explains. McGlynn prefers to pick a subsector and throw most – if not all – of his allocation at it. Such an approach, of course, entails more risk, but, for the most part, investors have been rewarded.
Last year, the fund went "out on a limb in transportation," buying up shares in commercial railroads, including CSX Corp., Norfolk Southern and Union Pacific. "Energy prices are a cost to them," McGlynn says, "but it's actually a competitive advantage," thanks to their fuel efficiency compared to road and air transport. Despite being sector neutral, McGlynn still makes bets; this one paid off – those three names alone were up between 19% and 27% in 2005.
"It's a bet, but it's not an outlandish, risky bet," McGlynn says. "We had substantial weighting in those names, and as they've risen and become popular, we've exited that whole subsector."
One of the fund's biggest bets right now is on broadcast media, where McGlynn hopes to capitalize on rising pressure to boost share prices. "Every management says it's not happy with their stock price, and they're going to do something about it." He cites in particular Time Warner, where activist investor Carl Icahn is pushing to break up the company and increase stock buybacks, and Sony, which was so unhappy with its performance it named Anglo-American executive Howard Stringer CEO last year. Stringer's appointment marked the first time a major Japanese electronics company has been led by a non-Japanese.
Viacom, another name in the fund's portfolio, is, like Time Warner, talking split, and The Walt Disney Co., like Sony, has faced changes at the top. News Corp., too, has underperformed. "We essentially have about five names as close to our full allotment" in consumer discretionary, because, he says, "there's a lot of management turmoil... That's always good."
Utilities are home to the fund's other big bet, but it's not on anything energy-related. McGlynn has focused instead on the turmoil in the telecom sector, where he says stock prices were "beat down way too far." Whereas he sees electric utilities at historic highs, telecoms are at historical lows.
"We're getting fat yields, 4.5% to 5%, in that sector, with good cash flow, stock buybacks," and a slew of consolidation, including Verizon's acquisition of MCI and SBC's purchase of AT&T. "I've had economics," McGlynn says, "and if you take out competition, usually your profits can go up."
He's also nonplussed by some of the doom and gloom rhetoric surrounding the telecoms. "Everyone thinks people are not using wireline, so that's bad for them." But, he notes, "[AT&T, which owns Cingular, and Verizon] are number one and number two in wireless."
Everest is also taking baby steps into that bastion of growth investing, technology, buying Cisco Systems, Intel and Microsoft. "These aren't bad companies," McGlynn says, "they just had too high a valuation."
He is, after all, a value investor; bad news is just an opportunity to buy low. "If the consumer is weak, I'm not worried.... If interest rates change, it doesn't matter.... How I run the money is: Is my subsector going to beat the other subsectors?"
With that strategy, he's pulled himself back, assets-wise, to where he started, returning investors almost 8% on an annualized basis since inception. With that track record, and the memory of his predecessors fading, the Everest Fund is prepping for a shot at the peak.
