The Tilson Focused fund (TILFX) was started on March 16, 2005 and co-managed by a well known hedge fund manager Whitney Tilson. Its prospectus highlighted a Graham-Buffetish approach to security selection – here’s an extract which sounds good/thorough.
Other attributes:To select equity securities for the Focus Fund, the Advisor seeks to identify companies that it understands well and that possess one or more of the following characteristics:
Most importantly, the Advisor seeks to identify companies whose stocks are trading, in the opinion of the Advisor, at a substantial discount -- preferably at least 50% -- to their intrinsic value. In determining discount to intrinsic value, the Advisor considers the following factors:
- • Positive (or projected positive) revenue or profit trends;
• Healthy balance sheet, characterized by ample cash relative to debt, efficient working capital management, high or increasing liquidity, or other metrics that the Advisor believes indicate the company’s ability to withstand unexpected shocks, reinvest in the business, and improve its business prospects and circumstances;
• Strong free cash flow generation;
• Powerful and sustainable competitive advantages;
• Management team that: (i) operates the business well and has a sound strategy to build it over time; (ii) allocates capital wisely to enhance shareholder value; and (iii) has high integrity; or
• Policies (e.g., compensation structures) that do not significantly dilute shareholders’ ownership.
- • Substantial discount from a price at which the securities of comparable businesses have been sold in arms’ length transactions between parties judged to be competent businesspersons;
• Substantial discount to the value of the business determined by cash flow analysis and qualitative strengths; and/or
• Substantial discount from asset value based on the total value of the company’s individual parts and assets, less the present value of its liabilities.
- • It was a multi-cap fund (not constrained to a particular company size)
• The fund was also fairly concentrated, holding typically 70 percent of assets concentrated in the top 10 holding, 35 percent in the top three holdings.
• Call options were sometimes used to amplify long position if manager thinks attractive to do so.
• There was a performance based fee based on fund returns relative to Wilshire 5000 – the better the performance the higher the expense ratio, the worse the performance the lower the expense ratio.
Annualized return April 2005 – December 2010
Tilson Focused Fund = 5.52%
iShares Russell Midcap Value = 5.46%
Then came:
2011 = -21.5%
2012 = -6.3%
Annualized return: April 2005 – May 2013
Tilson Focused Fund = 1.76%
iShares Russell MidCap Value = 7.86%
There was about a 0.5% per year tax cost which reduced the after-tax annualized returns since inception in March 2005 through May 2013 to close to 1%.
The Fund closed in June 2013.
Lessons
- • Security selection is difficult to do consistently well, even for established value investors
• Beating an appropriately matched index is difficult to do (in this case the Russell MidCap Value index).
• Call options can amplify gains, but they can also amplify losses
• Highly concentrated funds do best with one manager (rather than co-managers). Tilson said after some point he and is co-manager did not challenge each other enough (out of respect) on the others selected securities.
• Good past performance doesn’t guarantee good future performance
• Historical mutual fund returns have a significant survivorship bias (if you search in M* for Tilson Focused Fund it does not show up. Now that its closed, I think its record has been deleted from the database).
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