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Wedgewood's Lessons Pay Off

The St. Louis firm takes ideas from indexers and value investors to craft its solid large-cap growth strategy.

Dan Culloton, 11/30/2011

Wedgewood Partners is defined by its contradictions. Its founder, Anthony Guerrerio, is a New York native who moved to the Midwest to be a financial entrepreneur. Chief investment officer David Rolfe is an avowed growth investor whose idols include value-investing icons Mason Hawkins and Warren Buffett. Rolfe and his colleagues are active managers who not only agree with the arguments for passive index investing but also use them to justify their philosophy and strategy. And in volatile times that have driven many professional and amateur investors to do something, anything, to improve returns, Wedgewood has succeeded by keeping things simple and trading infrequently.

“We haven’t tried to reinvent the wheel here,” Rolfe says.

Indeed, Wedgewood hasn’t invented anything. Plenty of stock-pickers profess to abide by the tenets of the firm’s large-cap growth strategy. Morningstar fund analysts’ files are stuffed with presentations touting the virtues of searching for reasonably priced shares of firms with strong competitive advantages, growth, profitability, balance sheets, and management. The pitch is, frankly, a little hackneyed.

Self-awareness, humility, and patience set Wedgewood apart. Working from a modest colonial-style office building at the bottom of an I-64 exit ramp in St. Louis, the firm, which has $1.2 billion in assets, knows that it faces stiff competition from thousands of smart investors. “We compete in a very, very efficient space,” Rolfe says. “We know we don’t have an information advantage, and we are humble enough to know that we don’t have an IQ advantage,” Rolfe says. But the firm does have a structural advantage, he believes. Rolfe and his team--Michael Quigley and Dana Webb--limit their circle of competence, get to know a handful of stocks very well, home in on those they think can grow faster and longer than other investors expect, bide their time for the right moment to buy, and then let the market do the math. “If we can build portfolios that are this growthy and not have to pay up for it, then we have a horse race,” Rolfe says.

Wedgewood has run its race well, so far. Since its Sept. 30, 1992, inception through Sept. 30, 2011, the Wedgewood Concentrated Large-Cap Growth separate account has gained a cumulative 725.5% versus 554.8% for the typical large-growth separate account, 263.5% for the Russell 1000 Growth Index, and 331.6% for the S&P 500 Index. The account has achieved those results without much more volatility, as measured by standard deviation, than the Russell 1000 Growth Index, even though it’s focused and benchmark-agnostic. The firm’s only and still-young and small mutual fund, RiverPark/Wedgewood Fund RWGFX, has gained 3% annualized in the year ended Sept. 30, beating the average large-growth fund and the S&P 500 but lagging the Russell 1000 Growth by about 30 basis points.

The Kid From UMSL
That record is the product of the pairing of a West Point graduate who grew up in the Bronx and a Midwestern frat boy. In the early 1980s, Rolfe went to the University of Missouri to study engineering. He joined a fraternity and fell in love with his future wife--"Two of the best things in my life," Rolfe says--but engineering didn’t pan out. So, Rolfe returned to his native St. Louis to study finance and economics at the University of Missouri- St. Louis, where he got hooked on the Financial News Network, a precursor to CNBC, and the approaches of legendary investors like Buffett, Hawkins, Sir John Templeton, and T. Rowe Price. Rolfe started a student investment club and began plotting his career. “That’s what I wanted to do,” Rolfe says. “I wanted to invest.” The easiest way for a kid from UMSL, as locals refer to Rolfe’s alma mater, to get into investing was as a stock broker. After a few “incredibly unproductive” years at Westport Financial Group and PaineWebber, Rolfe became a portfolio manager at Boatmen’s Bank, which had St. Louis’ largest trust department. There he honed what would become his and Wedgewood’s competitive edge.

Rolfe knew from his education and reading that the stock market was pretty efficient and hard for active managers to beat. Yet he also knew from studying great stock-pickers that the market was not perfectly efficient. “There were enough investors who were outperforming the market on a consistent-enough basis to refute key elements of the efficient-market hypothesis,” he says. “There is a big gulf between relatively efficient and perfectly efficient.”

That investors often mispriced securities as they swung from fear to greed wasn’t an original insight. Few managers seemed to take full advantage of the inefficiencies, though. Those who did seemed to have one thing in common. “Whether they were growth or value,” Rolfe says, “They viewed investing more like a successful business owner than a green eyeshade investment analyst.”

Dan Culloton is an associate director of fund analysis for Morningstar and editor of Morningstar's Vanguard Fund Family Report, a monthly newsletter that offers independent, no-holds-barred guidance on the pros and cons of this dominant fund family. Click here for a free issue of the Vanguard Fund Family Report.

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