Where Primecap Management Got Its Start

On this episode of The Long View, Joel Fried and Al Mordecai of Primecap Management talk about running Vanguard Primecap Fund, the firm’s culture, top stocks, and more.

Here are a few excerpts from Fried’s and Mordecai’s conversation with Morningstar’s Christine Benz and Jeff Ptak:

Primecap Management

Jeff Ptak: I think that the place where we wanted to start was with your firm and its history. Primecap is obviously very respected in investing circles, but I’d venture to say the average person probably isn’t too familiar with your firm. Given that, can you give a quick thumbnail sketch of Primecap, how much money you run, how many employees you have on staff, maybe a stat on a number of relationships, clients you have, and that sort of thing?

Joel Fried: You bet. Primecap was founded in 1983. We are based in Pasadena, California, which incidentally was just named by The New York Times a couple of weeks ago as one of the 52 must-see places in the world this year. It’s only one of seven places in the U.S. that made the list. That will be my one shameless plug for Pasadena. We manage about $130 billion in assets. Approximately three quarters of those assets are in Vanguard funds that we subadvise, primarily the Primecap fund, the Capital Opportunity Fund, the Primecap Core Fund, and the U.S. Opportunity Fund. A little less than 20% of the assets are in our own family of mutual funds, the Primecap Odyssey funds. And the balance is in separately managed accounts for 20 pension fund, endowment, foundation, and sovereign wealth fund relationships. We have 40 employees, roughly two thirds of those are investment professionals, including client services and trading, and one third are operations and support.

Primecap’s History

Christine Benz: We want to delve into the Vanguard relationship in a minute, but before that, we wanted to get into Primecap’s history. It’s been chronicled elsewhere, but some of our listeners probably don’t know the firm’s origin story. So, we’re hoping you can talk about how Primecap got its start.

Joel Fried: Our three founders—Howard Schow, Theo Kolokotrones, and Mitch Milias—were senior portfolio managers at the Capital Group. Even back in 1983, when Primecap was founded, Capital was a substantial organization. It had offices around the world and managed about $30 billion in assets. That was a big number back in 1983. Howard, Theo, and Mitch had a desire to work in a smaller firm. Their idea was to create a new investment company, one that would preserve the investment philosophies that had served them so well at Capital, namely, fundamental research, long-term time horizon, individual decision-making, and a focus on companies that could evolve in a materially better way than their valuation suggested. But this new company would be small by design. By limiting the number of client relationships to 20 and limiting the number of employees, the founders believed that they could minimize the time they spent on noninvestment matters, and thus spend the vast majority of their time managing money, which was their real passion. And thus, Primecap was born in the fall of 1983. Our original business plan was to have 20 separately managed accounts. Each account would be a minimum of $25 million, and ideally, if everything went right, we’d have a $500 million firm. That’s really how it got started.

Why Does Primecap Keep to Itself?

Ptak: Primecap, as I mentioned before, it’s not as familiar to the public, and that’s for a pretty, I think, understandable reason, because your firm—you don’t advertise, you don’t speak to the media, or otherwise really promote yourself. And that’s unusual for a mutual fund firm. Why did you choose that path originally, and why have you stayed on that path through the years?

Al Mordecai: Jeff, every decision we make is geared toward supporting our mission, which is to provide superior investment returns for our clients. Hubris is a common pitfall in this industry, and we do our best to avoid it. While it may make one feel good or important to go on CNBC or to be profiled in a business magazine, we’ve never understood how that’s going to help us help our clients achieve superior returns. To the contrary, going on TV to broadcast one’s best ideas is more likely to hurt than help our clients. So, we try to limit such distractions, as Joel was talking about, so that we can focus on investing. Regarding advertising, we don’t want to grow to be too big. Becoming too large in terms of assets managed limits the universe of investable stocks, which results in the portfolio looking more like the very index that we’re trying to outperform.

Primcecap’s Culture

Benz: You’ve obviously played a critical role in shaping and upholding the firm’s culture, but to what extent do you think some of those choices the firm has made about how it operated, for example, focusing on research and portfolio management rather than sales and marketing and being on CNBC, were influenced by how the firm was established at the outset?

Fried: How we operate today is profoundly influenced by how the firm was established at the outset. As you mentioned, to date, our focus has been almost entirely on research and portfolio management, with little regard to sales and marketing. You shouldn’t take away that we ignore our clients. Quite the contrary, we spend as much time with our clients as they require. It just means that our focus has never been on actively marketing or soliciting new business. We’ve always maintained a Field of Dreams mentality: “Build it and they will come.” We’ve believed that if we provide a superior product, assets would find us. And, fortunately, for the last 40 years, that philosophy has worked pretty well.