Shocking Words from a Prominent Fund Firm

"We're not interested in becoming a financial powerhouse."

Such words are shocking. So often these days, when you read about a fund company, the story is about growth. We want to be bigger, they say, bigger than we are, bigger than the other gigantic families; we want to have the biggest fund. We're expanding product lines, we're getting into retirement planning, we're boosting our brokerage arm. How refreshing, then, to read the above declaration, made by the president of First Eagle funds, John Arnhold, in a letter to shareholders of the firm's handful of funds earlier this year.

He brought up this point after noting that rapid inflows had led to the closing of the firm's two most prominent funds (it offers only five). His point, which he went on to make clear, was that the long-term investment success of fund shareholders was the firm's primary concern--not the expansion of the advisor's overall business. He also frankly conceded that he and his colleagues were "concerned" about the asset growth and that the girth, while not altering the firm's value-oriented strategy that favors small and mid-sized companies, would necessarily diminish the impact of smaller stocks on the portfolios.

At a time when Fidelity continues to go ahead and unveil yet more new funds to add to the more than 200 already on its huge menu, and many American Funds continue to balloon in size, it's heartening to hear a successful fund firm publicly take the opposite stance.

Arnhold's words also offer a sharp contrast to the sentiments offered by the CEO of Julius Baer Investment Management late last year. "Despite mixed signals and results in the economic climate, the Fund enjoyed solid growth in net assets over the Reporting Period. The Julius Baer International Equity Fund's net assets soared over 170%, rising from $2.8 billion at the end of its last fiscal year to nearly $7.6 billion at the close of the current fiscal year." You read that right: Far from expressing concern, in his letter to shareholders of Julius Baer's funds, CEO Tony Williams actually boasted of the huge inflows that had ballooned the firm's  International Equity Fund (BJBIX) to an unwieldy size. He did not mention International Equity's excellent performance, apparently thinking that fund shareholders were more concerned with asset accumulation. (Indeed, that fund had to close about six months later, but the firm promptly opened a new, similar one.)

It's important to note that Arnhold's claim that First Eagle isn't aiming to become a powerhouse has been borne out by the company's deeds. Since it bought the former SoGen Asset Management (which was running three of the now-First Eagle funds) from Societe Generale in 1999, First Eagle has created just one new fund, carving out a U.S. portion from the global portfolio to match the gold and foreign-only funds similarly created earlier by SoGen. That gave First Eagle a total of five funds--and it hasn't created any others in the four years since. When  First Eagle Global (SGENX) and  First Eagle Overseas (SGOVX) were posting remarkably resilient, attention-getting returns during the bear market, it would have been easy for the firm to roll out other funds, such as a fund devoted purely to international small caps (to name just one possibility). But First Eagle resisted the temptation--if indeed it was tempted at all.

My intention here isn't to single out First Eagle, though. I simply had an easy time noticing Arnhold's letter because I'm a shareholder of both of the firm's big funds. The words also could have come from similar shops that place investing and the success of the funds' shareholders above becoming a potentially unwieldy conglomerate. Sound Shore, Longleaf Partners, and Third Avenue are some that come to mind. The few new funds that such shops do create typically focus on areas in which the managers have a particular interest and expertise, and which were already prominent in the original portfolio, such as Third Avenue's  Real Estate Value (TAREX) offering.

To be clear, I'm not claiming the folks from these shops are saints--for example, First Eagle arguably should have closed the Global fund earlier than it did--or that they work out of altruism. They've been quite interested in getting assets into the funds they do offer (at least when the funds are open), and it's safe to assume no one at those firms will be relying on Social Security checks to pay their bills in their retirement years.

Also, plenty of investors have enjoyed solid success with funds from Fidelity or other "powerhouses." I've owned funds from such firms. Most of them do care very much about the performance of their funds. But I feel more comfortable investing with firms that aren't worrying about grabbing market share from the other big boys or dreaming of groups of new funds to add to the lineup--in short, firms that couldn't care less about becoming a financial powerhouse.