Texan has built a $9.6 billion under-the-radar firm by delivering strong results and building relationships, instead of marketing and gathering assets.
Luther King Capital Management is one of the biggest asset managers most mutual fund aficionados have never heard of. The employeeowned firm doesn’t have a distribution arm and lacks a presence with advisors yet still has $9.6 billion of assets under management. Its eight mutual funds have just $1.5 billion in assets, more than half of which are in a small-cap strategy.
“The firm was not built to be product-driven because of its history. We were investors before we were a firm,” founder and president J. Luther King Jr. says.
After nearly 50 years in the industry, King knows gathering assets isn’t a formula for success, or at least the way he wants to do things. He’s more interested in delivering strong investment results for the firm’s client base, which includes high-net-worth individuals, endowments, foundations, pensions, trusts, and estates. Beyond that, King takes pride in developing relationships with the firm’s clients on both a professional and personal level.
“I can’t tell you how many funerals and weddings you go to in the investment business,” he says in his slight Texas drawl. With a charming and approachable personality, it’s easy to envision King offering advice to a client who was having trouble with one of her children. “That’s the key in the investment counseling world; you have to have empathy with people,” he says.
Based in Fort Worth, Texas, LKCM’s office is a mix of antique and modern. Glass offices form the perimeter, cubicles the middle. A large table in the conference room is made of carved wood, surrounded by ornate chairs. Native American art scenes dot the walls, with relics of Western art history and other emblems, such as a stuffed fox, placed here and there.
King, a sixth-generation Texan, started his career at the First National Bank of Fort Worth in 1963 and later went on to manage mutual fund assets for Shareholders Management Co., which became a part of American General Insurance Co. After a stint with a New York-based investment firm, which was sold, King ventured out on his own. He knew he wanted to be independent and stay in Texas but wasn’t sure whether to start a trust, a hedge fund, or a registered investment advisor. He chose the last and hung up his shingle in 1979. King always figured he was destined to become a regional bank president, so the move did involve some career risk. “I paid off the house, escrowed the kids’ college tuition, and went for it,” he says.
King’s first client was a wealthy family that had tried to recruit him to manage its investments. In a symbolic start that would continue to define the firm for decades to come, the family stipulated that he stay independent and not turn into a massive marketing and distribution outfit. For the first several years, King didn’t have business cards and kept his name off the door, only taking clients by referral. In the 1980s, the firm started managing money for foundations and universities and received some institutional business. On the institutional side, some people thought hiring managers from a small firm in Texas counted as portfolio diversification. Eventually some of those institutional clients dropped off as they demanded a more style-pure or passive investment strategy. Today, King says that about half of the firm’s clients are high-net-worth individuals, with the other half institutional.
Don’t Fence Me In
Its client base has evolved through the years, but the firm’s investment philosophy has remained unchanged. A credit analyst by training, King has always focused on such fundamental metrics as return on equity, return on assets, return on cash flow, and financial leverage, looking for solidity and sustainability. King employs what he considers a core strategy, avoiding deep-value turnaround plays while remaining sensitive to valuations. LKCM Equity LKEQX, the firm’s large-cap mutual fund, typically has a higher historical growth rate and price/earnings ratio than the S&P 500 Index but lower debt levels. It also has below-average turnover. “We let the management of the business build out the business value of the enterprise,” King says.