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    Guest Interview:

   Wilson/Bennett Capital Management, Inc.

    201 N. Union Street; Suite 230
    Alexandria,VA 22314

    Telephone: 703-837-0150
    Fax: 703-837-8122


    Interview Quarter: 1Q1996

 Jack Fisher



Q: Tell me about Wilson/Bennett and its origins.

A: Wilson/Bennett was founded in 1987 to provide financial advice to corporations and individuals. The company is a Virginia Subchapter S corporation equally owned by the two principals. Both of us have business ties to the area dating back forty years.

Q: Tell us about the size of your firm and your long term plan for growth.

A: Our objective when we formed the company was to operate in a manner which would enable us to develop long-standing relationships with our clients. We felt the only way to accomplish this was to remain a relatively-small organization. Our small size encourages active communication between the client and portfolio manager. Unlike a mutual fund where the client is typically just another number, we take an individualized approach to investing a client's assets. I have been in this business for approximately twenty years and I have watched other organizations grow to levels that I consider too large. The principals that generated the initial performance records eventually devote their energies and talents to running a large organization rather than doing what created that growth in the first place - generating superior portfolio performance returns. When a client opens an account with Wilson/Bennett Capital Management they should feel confident that the person that generated the past performance record is the one managing their portfolio.

Q: I know you don't like being classified by style, but if someone made you pick a style, how would you classify yourself?

A: Peter, you are right. Our style transcends the typical categories. For example, we will buy a stock that is currently out-of-favor and has fallen into the value category. Later, the stock may turn around and become a growth stock again. That doesn't mean we will automatically sell it. That said, I'll bite the bullet and tell you that we are best classified as a large capitalization value manager. In plain English - which I much prefer - we look for out-of-favor blue chip stocks.

Q: Jack, what distinguishes Wilson/Bennett Capital Management from the twenty thousand other money managers and mutual funds that manage money for people?

A: First, performance. Beyond that, our small size and the fact that the principals who generated our past performance continue to manage all of our clients' portfolios. Experience is also in our favor. We have experienced a lot of ups and downs in the market over the past two decades and that helps us run against the herd. A value manager is often viewed as being early in his investment decisions. Sometimes it is hard to distinguish between being wrong and being early. A little battle experience helps us stay our course.

Q: What are the major influences on your current approach to investing?

A: The approach we use is similar to the one a businessman might use to decide how much to pay for the corner grocery store. Put simply, we are businessmen buying individual companies on their own merits. We look for a business with undervalued assets and under-performing operations that have a strong potential to turn around. We then attempt to purchase that business at a level below its current market value. Fans of Ben Graham might recognize this approach, which comes right out of the 1933 edition of Graham and Dodd's Security Analysis. We have refined it further with a proprietary in-house screening process.

Q: As a classic value investor what are you looking for when you analyze assets within a company?

A: The analytical process that we follow is similar to the analysis 1980s corporate raiders used to evaluate their targets. There are some differences, of course. The raiders bought entire companies and attempted to sell off the pieces at a profit. When we buy a company we anticipate one of two things happening: The company itself might sell some assets in an effort to enhance shareholder value, or investors will eventually recognize the value of the firm's underlying assets and bid up the share price. These things take time, but we generally choose firms that pay relatively high yields - so we're paid while we wait.

Q: How many companies and industry groups do you follow?

A: We screen the Value Line universe of stocks for those that meet our capitalization minimum. Then we further narrow the list down by screening for key rations: price to sales, price to book, price to earnings, dividend history and key shareholders. The list of companies that we will then analyze in depth is typically 15 to 20. In the end one or two may make our final buy list.

Q: How many stocks do you typically own in a portfolio?

A: Usually 10 to 15. We try to pick the single best value in a particular industry. For example, we will not invest in 10 different drug companies (in the hopes that we get the right one) just because we think the drug stocks are undervalued as a group. We try to identify the best value within the sector we like and then invest in that company. The logic of adding a second, third or fourth choice escapes me.

Q: Do you feel that 10 to 15 stocks gives you sufficient diversity in the portfolio?

A: Absolutely. Studies show that beyond a certain point more stocks and sectors don't really increase your diversification benefits. Instead, they just water down your portfolio and make it tougher to add value through intelligent stock selection. We generally restrict portfolios so that no more than 30% of their assets are invested in any one industry group and no more than 10% are in any one stock. Those percentages are based on original purchase values. We won't sell one of our winners simply because the stock has run up to more than 10% of the portfolio.

Q: What led you to your decision to concentrate your investments only in blue chip stocks?

A: First, liquidity. We can establish or liquidate positions without having much of an impact, if any, on the current market price of a blue chip stock. Second, our analysis suggests that blue chip stocks are generally less volatile as a group than smaller issues. A large blue chip company may be out-of-favor and the stock price may be depressed, but companies that have been established for decades typically do not go out of business and often will bounce back in time. Third, by investing in large multi-national conglomerates we can invest in other economies around the world without leaving the security of our own markets, regulations and currency.

Q: You emphasize the low volatility of your portfolios. Can you tell us a little more about the importance of volatility?

A: Our investment style tends to attract fairly conservative clients who are looking for someone to manage core assets in their portfolios. By definition this conservative core philosophy stresses low volatility. We try to keep volatility relatively low by buying unloved stocks and avoiding high flyers that could disappoint investors and suffer big losses. We are trying to add something intangible to our clients' portfolios: Call it the sleep-well factor.

Q: How do dividends factor into your stock selection?

A: We manage for maximum total return which includes not only stock appreciation but dividends as well. Dividends are crucial in our stock selection process. If a stock does not meet our dividend screen it will not go into a portfolio. The reason behind our emphasis on dividends is quite simple. If you trace the market from 1920 through today, the market has generated approximately a 10% total return. Roughly half of that total return can be attributed to reinvested dividends. There is an old saying on Wall Street, "Don't fight the tape". The tape tells us that dividends are a critical component of total return in portfolios. Our portfolios tend to pay dividends significantly higher than market averages which reduces volatility over time. We also use the dividend payment record of a company to help us determine whether a board of directors is pro-shareholder or not.

Q: Jack, you said that you manage for maximum total return in portfolios. What exactly do you mean by "maximum total return"?

A: Typically when a money manager talks in terms of managing for total return he is referring to stock appreciation plus dividends. When I refer to maximum total return I am including stock appreciation, dividends and taxes. My objective is to generate above-average market returns and keep taxes as low as possible. We accomplish this in part by keeping our turnover rate relatively low. The reasons should be obvious: Long-term gains are taxed at a lower rate than short-term gains-and aren't taxed at all until you actually realize the gain by selling the investment for a profit. The IRS should probably call it a transaction tax rather than a long term capital gains tax. If there is no transaction there is no tax due. Think about how much faster a portfolio grows if profits are able to compound tax deferred. Taxes should play a very real and important role in an investor's decision making process.

Q: Describe to us the process you follow when you receive a new account. Are funds immediately invested in the market or do you buy in gradually?

A: Depending on current market conditions it may take several days or even several months to fully invest an account. That helps avoid the risk that we invest a large sum at precisely the wrong moment. More important, however, we wait to invest until we feel the price is right. We do not invest for the sole sake of investing. A stock must meet our buy level before it is added to a portfolio.

Q: Once the account is fully invested do you try to time market moves or do you remain fully invested?

A: Our objective is to remain fully invested at all times. For various reasons we always seem to have a small percentage of cash in the portfolios. Once the account is fully invested it will generally remain that way. We do not try to time the market. Our crystal ball is certainly no clearer than anyone else's. Existing literature on market timing reveals that attempts to trade the market generally under perform a buy and hold strategy. A simple analysis of historical data for the forty year post World War II period shows that $1,000 invested in stocks would have compounded to $91,000. The same $1,000 invested in T-bills would have grown to only $6,400. However, if market timing caused an investor to miss the best 34 months of those 40 years, an average of 3-1/2 weeks per year, the $1,000 would have grown to only $6,200, less than the return on cash. Our position is that a combination of taxes, commissions and missed market moves generally causes market timing strategies to under perform a buy and hold strategy.

Q: If you are in the business of buying companies rather than predicting markets, how long do you typically hold your stocks?

A: We typically hold stocks for three to five years. If we hit a home run or pick a loser we will certainly liquidate the position. Rarely will we sell a stock that we have held for less than twelve months. Let's go back to my corner grocery store example. Assuming we were buying the business on a turnaround basis, we would not sell the company six months after we bought it simply because someone offered us 10% or 20% more than we paid. Likewise, we would not run out and sell in a panic if someone offered us a price significantly lower than our purchase price. Our objective is to buy a business and give the organization and management a chance to implement their business plan and make an under-performing business more profitable. Our approach to stocks is no different. We are looking for undervalued companies with strong pro-shareholder management. The Board should be in the process of implementing a plan to enhance shareholder value. This process generally will require three to five years.

Q: What is the annual turnover in your portfolios?

A: Turnover will obviously vary from year-to-year. Typically our turnover rate ranges between 25-35%, which is very low in this industry. Although it is very tempting, we rarely trade for short-term profits or losses.

Q: If you were able to create the perfect investment, what characteristics would it have?

A: We are looking for major multi-national companies that have demonstrated an ability and desire to enhance shareholder value. Some of these characteristics include a history of consistent and increasing dividends, divesting the company of non-core assets, paying down debt, repurchasing stock, and large management ownership of stock. In addition, the company should be in an industry that is temporarily out-of-favor. A large shareholder with a history of activism is viewed as very positive. Low institutional ownership is also viewed as very positive. Finally, it's great if there are only a few Wall Street analyst following the stock.

Q: Not all of your stocks will be winners. What do you do with your losers?

A: Probably the hardest part of this business is admitting that you are wrong on one of your stock picks and stepping up to the plate and taking a loss. We have certainly had our number of losers over the years. Investors should realize that portfolio management is not an exact science and that losses in the portfolio are part of the realities of investing in the stock market. In the portfolio management business it is statistically not unusual to see a portfolio of stocks in which 30% of the stocks remained flat, 30% went down and 30% went up. The remaining 10% was where you really made the money. It is very difficult for people outside of this industry to understand how a portfolio manager can be wrong 30% of the time and still be considered top in the industry. For example, in the medical profession if a doctor was wrong 30% of the time he would certainly lose a lot of patients. I find the most frustrating aspect of the market is that you can be 100% right in your analysis and still lose money on a stock. Investors should keep in mind that this is not an exact science and that losses in a portfolio should be expected. That said, when a stock drops 20% more than its industry group a sell is triggered. A stock is not automatically sold when it hits this level. If a stock drops 20% more than the industry group it is an indicator to us that we should review our analysis and determine if we made a mistake. Usually if a stock falls this far it is an indication that something is fundamentally wrong with the company and it is not just an out-of-favor industry. The portfolio manager makes the final sell decision based on this data.

Q: How do you identify stocks that meet your buy criteria? Do you use computer screens? If so, for what attributes are you screening?

A: We rely heavily on computer screens for the initial selecting. Our initial computer screens will generally produce a list of stocks that consist of thirty to forty different names. Our proprietary screening system then searches for capitalization, dividend history, ownership, price earnings ratios and trading ranges. Computers are incapable of factoring real-world events into buy-sell decisions, so we use our skills and experience to make those choices. There is no magic black box.

Q: Would you consider your approach to be either top down or bottom up?

A: As a value manager, we are initially bottom up. Once we identify a stock we step back and look at the world around us. One of the problems with value investing is that you can find yourself driving with your eyes on the rear view mirror. History is a great indicator but you need to be able to think ahead and make estimates about the future. After we have selected a stock we review our analysis from a top down perspective to get a sense of how macro-economic factors might affect a company's performance. We never put much weight in technical analysis - but just between you and me, the last thing I do before I buy a stock is look at the chart to see what the other guys might be thinking..

Q: As a small firm, it would seem that your resources are limited. Where to you obtain your investment research and what resources do you use?

A: Our buy-sell decisions are based purely on our in-house analysis. We use research from most major Wall Street firms to get quantitative information about a company. As a rule of thumb, we virtually ignore their buy-sell decisions. Wall Street provides excellent data but the conclusions they reach from that data usually are different from our conclusions. Keep in mind that we are not trying to discover the next Microsoft. We are following out-of-favor blue chip stocks. We don't need a large research staff traveling the country in search of emerging companies. Reworking old and tired ideas is where we add value.

Q: There are many different types of investors. What kind of investor would be interested in your investment style?

A: We tend to attract conservative, long-term, patient investors seeking a quality portfolio of blue chip stocks. Our clients generally want fairly high dividend yields and low volatility. We are typically viewed as a core investment - with the more exciting and glamorous trading activities delegated to other managers. Many people in our industry view this management style as exciting as watching grass grow. Also, our clients are people who like to be able to kick the tires and talk to the people making the buy and sell decisions.

Q: Do you have any closing comments?

A: We are not for everyone. Various styles attract different types of clients. For those investors looking for a core asset strategy, our style may meet their objectives. We always encourage prospective clients to contact us and discuss our investment style in greater detail.

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