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Where Shareholders Ride First Class

At Berwyn Funds, Bob Killen is willing to make the tough decisions for his investors.

Greg Carlson, 06/11/2012

This article originally appeared in the June/July 2012 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000. 

Bob Killen is a manager who doesn’t flinch when it comes to doing right by shareholders.

In late 2010, for example, in the midst of a mad scramble by investors searching for income, Killen and his investment team closed Berwyn Income BERIX to new investors, a fund that accounts for 70% of Berwyn Funds’ $2 billion in total assets. Inflows were accelerating too fast, and the managers weren’t finding many new opportunities, causing the fund’s cash holdings to spike. After working down that stake during 2011’s third-quarter downturn, Killen reopened the fund. “We’re not asset-gatherers,” Killen says. “We’re responsible to our shareholders first. We want to be good stewards.”

The decision to close a fund, albeit one that provided the firm a steady flow of new assets, paled in comparison with a situation Killen had to confront in 2009. His brother, Ed, a founding partner, left the firm by mutual agreement. (He moved over to an affiliated broker/dealer in which both Killen brothers own stakes.) “We all felt he wasn’t making the contributions he used to make, and that included Ed,” Bob Killen says. “The overall approach we used to use, including using Value Line, was something he clung to. It led to strains. Our strategy didn’t change, but the methodology changed.”

Killen’s commitment to putting the interests of shareholders over his own has paid off. Over the trailing decade through April 2012, Berwyn Income and Berwyn Fund BERWX have beaten more than 85% of their respective conservative-allocation and small-value peers. Both earn a Morningstar Analyst Rating of Silver under the new analyst-driven ratings system. The firm’s third fund, Berwyn Cornerstone BERCX, got off to a tough start in the post-2002 rally after a bear market but now lands just outside the large-value category’s top decile since its May 2002 inception.

“While they are risk-averse, they are also very high conviction,” says advisor Barry Mendelson of Capital Markets Consultants in Milwaukee, who uses the Income fund in client portfolios. “The fund will close and then reopen. Why? It closes when euphoria reigns and opens again when opportunities are aplenty.”

Contrarians in the Go-Go ‘60s
It’s a wonder that Berwyn’s funds aren’t high-growth vehicles rather than the stodgy value funds that they are. Killen became interested in investing in the “go-go” 1960s, when growth stocks soared. But Killen liked value stocks. Then an aerospace engineer with General Electric in the suburbs of Philadelphia, he and friend Jim Kalil, an engineer at DuPont, formed an investing partnership in 1969 to manage money on the side, keeping their day jobs. Their mentor was a friend who had been investing in small-cap stocks using a contrarian value approach since the late 1940s.

If the timing of Killen’s entry into investing was a little off—mega-growth stocks that ran up in the 1960s didn’t meet their comeuppance until 1973—he eventually got his due. Small-value stocks he was buying held up better than most in the 1973–74 bear market, then roared ahead when the market bounced back in 1975. They outperformed the broad market by a wide margin during the rest of the 1970s.

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