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What Two Great Managers Are Buying

Inside Clipper Fund's makeover.

Russel Kinnel, 04/24/2006

Ever since Chris Davis and Ken Feinberg were hired to run Clipper Fund CFIMX, I've been eager to see what they would do with this concentrated portfolio. Davis and Feinberg don't typically trade much so I figured the new portfolio would be a good indicator of what appeared attractive to them now. Likewise, I was interested to see which of the old Clipper team's holdings they would sell.

Davis and Feinberg's past takeover of Selected Special SLSSX shows that they don't automatically toss out all the old holdings. Rather, they seem to treat legacy positions a little like they treat mistakes in their own portfolio. If they make a mistake and a stock gets hammered, they reassess their fair value estimate and will continue holding if they think the stock is significantly undervalued. In a similar vein, they'll hold on to inherited positions if they believe there's real value there--even if they wouldn't have bought the stock in the first place. That's rather different from most managers who toss out their inherited holdings--as well as their mistakes--as soon as possible no matter the price.

Now, the wait is over, and it turns out that Davis and Feinberg have made quite a few changes to Clipper Fund. In a recent shareholder letter, Davis and Feinberg say the transition is now largely complete.

Financials

The most dramatic action took place in this sector. It's a favorite area of both Clipper's former managers and its current managers, yet their approaches are quite different. The old Clipper managers loved a fire sale and wouldn't hesitate to buy a controversial, beaten-down stock. Davis and Feinberg, by contrast, want good managers who have generated strong returns on invested capital. Davis and Feinberg care about price, too, but they're willing to pay a fair price for a good company rather than wait for something to be supercheap.

With that preamble, you shouldn't be surprised that Davis and Feinberg dumped Fannie Mae FNM and Freddie Mac FRE, the controversial and battered quasi-federal mortgage lenders. Both got in trouble for manipulating accounting and face an uncertain future with regulators.

That's not to say that controversy always scares off Davis and Feinberg. They've made American International Group AIG their top holding. That firm's role in bid-rigging and its Byzantine structure, including having executives paid by the separate Starr companies, have scared some away. Yet, the company seems to be putting those issues behind it, and it's still very profitable and well positioned in markets across the world. Indeed, our stock analysts rate it 4 stars. From a recent report: "Although it has increased the value of its shares more than 100-fold during this analyst's lifetime, AIG is likely to sustain its record as one of the market's great wealth-compounding machines, in our view. The insurance conglomerate's enduring--if narrow--moat, rapidly growing marketplace, and freedom from obsolescence risk endow some competitive insulation and abundant opportunity to grow."

The other financial additions are longtime holdings of Davis and Feinberg where they like management and the company's position: Golden West Financial GDW, Berkshire Hathaway BRK.A, and J.P. Morgan Chase JPM.PAGEBREAK

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