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Gordon Croft, Croft Value

Headquartered in an 87-year-old building designed to withstand any disaster, Croft-Leominster survives on a flow of contrarian ideas.

Rob Wherry, 10/11/2010

The four-and-one-half-story building at the corner of Water and South streets in Baltimore has stood the test of time for almost 90 years. The original structure featured a sturdy red-brick façade with 10-inch-thick walls in some places, eight-over-eight windows with stone sills, and a gabled slate roof. Even when it was built, its Colonial-style architecture was considered old-fashioned compared with the sleek new steel-and-concrete high-rises going up around the city. Nevertheless, Canton House, as it is called, still stands today much like it was when it was completed in 1923.

It's fitting, then, that this sturdy and unstylish structure is now home to an investment firm whose stock-picking strategy has avoided flashy investing trends while riding out much of the market's ups and downs during the past 20 years. Croft-Leominster is a family-run company that manages $600 million across separately managed accounts and two mutual funds. Gordon Croft and his two sons, Kent and Russell, are traditional value investors who pride themselves on generating contrarian ideas.

"We want to keep a flow of ideas coming," Kent Croft says. "That is our singular focus."

While neighbors T. Rowe Price and Legg Mason run hundreds of billions of dollars from soaring towers along the city's famous Inner Harbor, Croft is content to keep a low profile. That's fine with shareholders, especially given the firm's track record. Croft Value CLVFX, the company's $300 million flagship fund, has returned an average annual 3% during the trailing decade versus a 1.5% drop for the S&P 500. The fund is up 1 percentage point on that same benchmark during the trailing 15 years.

"Why doesn't Kent Croft have billions of dollars in the fund?" asks Adam Bold, founder of The Mutual Fund Store chain and a large shareholder who was attracted by the firm's long-term track record. The only reason, he says, is "because nobody has heard of it."

Family Reunion
Just three blocks separate Croft-Leominster and T. Rowe Price in downtown Baltimore, but the ties between the two firms are even closer. Gordon Croft was hired at T. Rowe in 1967 and spent 22 years at the company as an investment counselor, director, and fund manager. Croft became well-schooled in T. Rowe's growth stock-picking strategy. But while he was there, he was also given freedom to explore investment ideas--at either end of the market-cap and style spectrum and located here or abroad. That approach can be seen in Croft Value--it is an all-cap fund that features domestic value stocks, but it has some growth and international names, too. And, ultimately, the independence T. Rowe gave him as a fund manager made it easier for Croft to open his own firm.

In the mid-1980s, Kent Croft was working in the equities department at Salomon Brothers. At the time, Salomon was run by John Gutfreund, the Wall Street legend later depicted in the Michael Lewis bestseller, Liar's Poker. Although Croft avoided the fixed-income shenanigans that later plagued the company, he realized Salomon wasn't a permanent home. He moved back to southern Maryland and worked on real estate deals for a year while living in a house a mile out in the woods. He and his father then hatched the idea for their own firm. PAGEBREAK

The Crofts opened Leominster, Inc. in 1989 with roughly $500 million under management. (Leominster references a town in England where there is a Croft Castle. The family name was added several years later.) Half of that money came from a single institutional account that followed Gordon Croft from T. Rowe, but that client soon pulled out its money when its board got spooked about using a small, unproven firm. As assets dropped to around $100 million, the pair hunkered down managing separate accounts. They added two mutual funds in 1995, Croft Value and a companion fixed-income fund, Croft Income CLINX. A second son, Russell, become a fund manager in 2006, after several years at Gabelli & Co.

Rob Wherry is a mutual fund analyst with Morningstar.
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