Late in 1990, Robert E. Torray started a mutual fund for the best possible reason: His friends asked him to.
Until then, he had been managing pension money for huge corporations like Boeing Co. and and unions like Amalgamated Transit. He was posting an amazing record _ a return of 493 percent for the previous 10 years, according to CDA Investment Technologies (third best among the nation's money managers). But he would not take individuals as clients because he didn't have the staff to handle them one on one.
Still, his friends wanted a piece of the action, and, to make them happy, he started the Torray Fund, never expecting it to amount to much. He was wrong.
Assets have grown from $23-million in 1994 to $116-million at the end of 1996 to $180-million last week. New money is rolling in the door at the rate of $1-million a day, and Torray is thinking about closing the fund to new investors "at some point in the future; just when is hard to say."
It's not difficult to understand the success. The no-load Torray Fund, which is based in Bethesda, Md. ( (301) 493-4600), has been producing high returns with low risk ever since it was launched. With that combination, I think it's one of the eight or 10 best among all diversified U.S. stock funds, with top ratings from both Morningstar (five stars) and Value Line ("1").
I'll admit to a personal bias. I like the Torray Fund because Bob Torray's investing philosophy is similar to mine. Everyone should own a fund that's so sympathetic it's almost personal.
We'll get to philosophy in a second, but, first, the numbers.
Over the past five years, Torray has returned an annual average of 20.8 percent for shareholders _ nearly 4 full points better than the benchmark Standard & Poor's 500-stock Index. If you had put $10,000 into the Torray Fund at the start of 1995, you'd have more than $20,000 today.
The fund is consistent. It's ranked in the top 5 percent of all funds for the most recent six-month, one-year, three-year and five-year periods.
What's most remarkable is that Torray posts big numbers (up 50.4 percent in 1995, etc.) while keeping risk, or volatility, one-third lower than the average fund, according to Morningstar. The fund keeps tax liabilities low, too. Morningstar calculates that the annual tax bite for investors who have stayed in the fund for the past five years is only 6 percent. That compares with 24 percent for Fidelity Magellan.
Torray runs the Torray Fund the way he manages money for his pension clients. It's a strategy all investors should emulate:
He keeps a small portfolio (just 43 companies at last count) that is highly concentrated (the top 10 stocks comprise 50 percent of assets). He owns mainly large-cap stocks, but size doesn't matter much. "Study businesses on a case-by-case basis," he says, "and pick the good ones."
He buys stocks he believes are undervalued. Right now, for instance, his largest holding is AT&T Corp., which represents a hefty 6.6 percent of the Torray Fund portfolio. "I think it's an excellent company," he told me. "It's a great brand name with good finances." It's also cheap, trading at a price-to-earnings ratio of 11, or about half the level of the market as a whole.
He holds his stocks for a long time. "I don't get into stocks that I want to sell to someone else," he says, coining a motto investors should hang on their walls. In 1996, the fund's turnover rate was a mere 11 percent. That means Torray sells just one stock in nine each year. The average fund manager, by contrast, has a turnover rate of 84 percent.
He pays no attention to the stock market as a whole. I asked him, "How much do you care what the market will do in the next year?" He answered, "Zero. In fact, I don't care what it will do in the next 20 years." He cares about his own stocks, not about the 10,000 others.
He admits that some of the stocks he owns have run up so high that their prices may have outstripped current economic fundamentals. One example is Johnson & Johnson. Torray paid $22 a share, and it's now at $59, and at a P/E of 27. I asked him if he was tempted to sell.
"I'm really not," he said. "All I do is look at the business. J&J is an outstanding business. It's a bull market price, but if I sell, my shareholders will have to pay taxes. And if I had to find a replacement that's better than Johnson & Johnson, I couldn't."
He also calculates that, if earnings continue to grow at a double-digit rate, "there's a good chance they'll double in five years." That's not bad. "I'd just as soon wait."
So he's holding his big winners, including drug companies (Bristol-Myers Squibb Co., Eli Lilly & Co.) that he bought when the market pummeled them in 1993 and 1994, in anticipation of the Clinton health plan. With the new money that's flowing into the fund, he's buying stocks he deems cheap: In addition to AT&T, he also likes three cable companies _ US West Communications Group, Cox Communications Inc. and Tele-Communications Inc. "Almost everyone has soured on them," he says, happily.
But they have strong market positions, and they've shown their ability in the past.
"I'm inclined to think it's a reasonable guess that they will do well going forward," he says.
That, too, is a lesson for small investors: You don't have to know exactly how a good company will earn its profits in the future; just know that it's a good company.
Torray tells shareholders in his annual report that he likes to invest "in sound businesses, which for one reason or another may have hit a bump in the road, causing investors to run for cover." That's why he bought the drug companies a few years ago, as well as Salomon Inc., his largest holding; Sallie Mae, the student loan financing firm; and International Business Machines Corp. Another success is a far smaller stock, Liberty Bancorp of Oklahoma, which traded at $10 a share in 1991 and was bought out recently by Banc One Corp. at $52.
Torray's approach is opposite of that of most mutual fund managers, who trade feverishly and need to post knockout numbers in every quarter. Torray is his own boss, and he makes a very nice living from the $2.5-billion in pension money he manages.
"The way to do well for shareholders," he says, "is if you don't need the job in the first place."