Cost, Capacity, Corporate Culture, and Conviction

Beck, Mack & Oliver Partners (BMPEX) recently earned a three-year record and a 5-star Morningstar Rating--but that's not why it is worth reading about. Three years of success might be a blip, after all. Many young funds that burst out of the gate don't sustain their pace over the long run. Small asset bases can mean high expenses that are hard to consistently hurdle, asset growth can compromise a strategy, and growing pains at a small firm can lead to manager turnover. This fund, however, has decent odds of continuing its success.

Cost is one point in its favor: a reasonable 1% expense ratio, not bad for a fund with roughly $135 million in assets. Attention to capacity is another: Manager Zac Wydra anticipates a soft close at around $1 billion in assets and expects to close the fund completely at $1.5 billion. Those two factors are signs of another advantage: a strong corporate culture at Beck, Mack & Oliver LLC, which manages around $4.8 billion, primarily in institutional and high-net-worth individual accounts.

Old-Line Asset Management
As John Rekenthaler, vice president of research for Morningstar, recently observed, "a disproportionate number of excellent fund companies" are structured as private partnerships, including Capital Research & Management and Dodge & Cox.

That may be because they don't face external pressures to grow unsustainably. Founded in 1931, Beck, Mack & Oliver is a limited liability corporation that functions much like a private partnership. It currently has seven partners (technically "members") who receive a percentage of net profits during their tenure. At the age of 65, partners start to divest their shares, giving them outright to younger partners over five years. They are willing to forgo a payout at the end to protect their legacy and attract talent. Wydra joined the firm in 2005 and says the arrangement made it an attractive alternative to running a hedge fund. If new partners had to buy out the retiring members, they might need to rake in new assets or bring in an outside investor--events that could threaten the culture and investment strategy.

The Partners fund itself has a long history. It began as a limited partnership in 1993 and was converted to a mutual fund structure to expand the firm's client base to smaller investors at the end of 2009, when Wydra took over. The fund's longer-term performance is thus not directly applicable and not included in the star rating. However, it is still worth noting that the strategy's annualized 10-year return through July 12 (8.7%) beats the S&P 500 (7.5%), because stock-picking at the firm is something of a collaborative effort. While Wydra is sole manager of the fund, he cannot initiate a new position unless at least three other partners approve the idea and are willing to buy it for their own portfolios. The other partners operate under the same constraint. They are all free to select among securities from the approved list and to size positions and sell as they see fit.

High-Conviction Stock-Picking
Wydra believes that limiting assets under management is essential to the success of his concentrated, all-cap strategy. With a $13.5 billion average weighted market cap, Partners just lands in the large-cap blend category. The 30-name portfolio has far fewer names than the typical large-cap fund's, but it is in one sense much broader: About half of stock assets are in small- and mid-cap names. It runs the gamut from  IBM (IBM) to small-cap  PICO Holdings  (a holding company that owns water resources, agribusiness, real estate, and homebuilding operations). Each pick was more than 4% of assets at the end of the first quarter.

What the names have in common, says Wydra, is his "very high degree of confidence that the risk/reward profile is asymmetrical to the reward side." He generally looks for companies promising strong future cash flows or increased book value, strong or improving balance sheets, and a sustainable competitive advantage in an industry with positive secular trends. He is willing to concentrate where he finds opportunity: He's been building a significant overweighting in underperforming energy names--the biggest driver of the fund's lagging returns for the year to date.

The Attendant Risks
Careful security selection is Wydra's main form of risk control: He invests only where he sees a low probability of permanent capital loss. So far, so good: The fund's Morningstar Risk rating, which emphasizes downside volatility, is Average compared within the large-blend category, where most funds are far more diversified. That said, another analogy with Dodge & Cox is appropriate. There, too, the managers aim to avoid permanent losses by picking the right stocks for the long term, while ignoring shorter dips--but while the extreme losses at  Dodge & Cox Stock (DODGX) during the financial crisis may have been short-term, they sparked outflows from shareholders unable to hang tight.

Wydra cites Chuck Akre as an investor he admires. Akre's record running concentrated portfolios at  Akre Focus (AKREX) and before that FBR Focus (now Hennessy Focus Investor (HFCSX)) illustrates that short-term bumps can iron out nicely in the long-run. The Partners approach and portfolio also invite comparisons with  Third Avenue Value (TVFVX), however, which has been a rocky ride for shareholders. Even  Fairholme (FAIRX) comes to mind, as it was the biggest shareholder (as of the end of February) of Partner's top pick, quirky holding company Leucadia National Corp (LUK). To be sure, Wydra would not go to such extremes as Bruce Berkowitz--he says he is unlikely to let one pick reach even 10%. However, there is always risk coiled in a portfolio concentrated in both stocks and sectors.

Morningstar has had an eye on the fund since late 2011, when Morningstar Advisor magazine featured Wydra in its Undiscovered Managers series. Because of its small size, the fund hasn't made it onto the analyst coverage list, so it doesn't have a Morningstar Analyst Rating. Beck, Mack & Oliver's commitment to maintaining that small asset base, however, is reason for active management enthusiasts to take a closer look.