... and the case for providing them.
In a recent Fund Spy column, I emphasized the importance of clarity, detail, and opinion in the letters that fund managers send to their shareholders. I explained why this is important and what elements a good shareholder letter should include. However, that column did not have room to highlight examples that met the standard. Therefore, today's column will look at a few that, though not perfect, do reach a level that all should aspire to.
At a basic level, these letters should provide a feeling that the author is an energized, thoughtful investor with a personality, holding opinions that don't simply repeat the consensus view. This might seem a low bar, but you'd be surprised how many letters are blandly written and have little of value to say. Moreover, asking for personality and opinion actually sets a higher standard than it might appear. Anecdotes or jokes alone do not demonstrate these qualities. Rather, detailed discussions of investment strategy and specific, well-supported views on securities in the portfolio--or those consciously excluded from the portfolio--tell a reader that a real person is at the helm.
At some firms, the managers themselves may not write every word of these letters. People on staff, often research analysts or former financial reporters, may help produce the language in the final version. There's nothing wrong with that--in fact, it can be beneficial to readers--as long as the thoughts and sentiments are those of the manager. In the best letters, there's no question whose ideas are being expressed.
Take a look at the letters from Third Avenue Value. No one who reads Marty Whitman's commentaries will have any doubt that he forms his own opinions, feels free to express them, and has a deep knowledge of investing. More specifically, and more important for shareholders, one emerges with a full understanding of his investment philosophy and how it differs from those of most other managers (and in some cases, academic theory).
For example, in the April quarterly letter, Whitman offers an extended discussion of whether share buybacks, dividends, or acquisitions are the preferred method of cash use for companies. The text includes details about how companies in the funds' portfolios have handled this issue, and the answers are not simple. From the level of the analysis and clarity of the argument, it is obvious Whitman and his colleagues have thought long and hard about these questions, have come to their own conclusions, and are using these convictions to shape their portfolios.
Whitman is now chairman of Third Avenue Management rather than a listed
portfolio manager, but the individual managers' letters, from investors such as
Ian Lapey of
The management letters from First Pacific Advisors also allow readers to understand fully how these managers invest. In their lengthy, detailed, and clearly written letters, managers such as Steve Romick of
It's particularly noteworthy when a manager admits a mistake. In FPA
Crescent’s 2011 annual report, manager Steve Romick shows how this can be
done in a forthright manner without seeming overly apologetic or defensive. He
explains how he erred in two different ways with