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| | Mutual Funds
Patience rewards Hodges Fund investors
Despite last year's 80% return, little-known Hodges Fund really invests for the long haul. Manager Don Hodges aims to make a difference in small investors' lives.
By Timothy Middleton
Texas sprawls with wastelands, and Texas Pacific Land Trust (TPL, news, msgs) owns a million acres of them. Dotting some of that acreage are 2,800 derricks gurgling up oil and natural gas. All Texas Pacific does is sell off chunks of that grizzled prairie, collect royalties on all that muck and buy back its stock.
If Ive ever seen a stock in my lifetime that I think would be the perfect stock to pass wealth on to children and grandchildren, its Texas Pacific Land Trust, says Don Hodges, manager of Hodges Fund (HDPMX), which owns 20,000 shares, half of them purchased in the last six months, as the stock price was surging more than 30% to its current level around $77.
Its the kind of thing that 10 years from now might be $300 a share, Hodges says, because the trust uses its income to buy up some of the 2.2 million shares still outstanding. Last year, he says, the company bought back about nine shares for every acre it sold. Whoever ends up with that last batch of shares is going to have a lot of bang in them, Hodges reasons.
Wall Street isnt beating a path to Texas Pacific because nobody ever heard of it -- no analyst covers it and none of its eight employees markets it. Hodges happens to live and work in Dallas, however, and he has uncovered all kinds of interesting local investments, as well as national ones. His fund soared 80.2% last year and this year is defying the weak market with a 1% rise, as of July 28.
But nobodys beating a path to Hodges, either. The funds assets are a mere $52 million, and more than 5% of that is the managers own retirement account. No analysts cover the fund. It's rarely mentioned in the press, although Strategy Lab contestant Janet Brown touted it in April.
Something to own for years
Like Janet, I was drawn to the fund by my own research, but for quite different reasons. She's a momentum investor, hiking aboard hot funds and then exchanging them for others when they inevitably cool. I prefer longer-range investments and regard Hodges Fund the way Hodges regards Texas Pacific: something to own for years, not months.
Hodges Fund is practically guaranteed to disappoint an impatient investor. Its returns are what financial planners disdain as lumpy. It has beaten the market in only four of the last 10 years, including this one so far, but its annualized returns over that period of 13% topped the S&P 500 Index ($INX) by 1.2 percentage points each year.
In the same period it beat the Russell Mid-Cap Growth Index ($RDG.X) by more than two points annually, and Morningstar considers it a midcap growth fund. But it defies categorization. Texas Pacifics market cap is a microscopic $170 million. Starbucks (SBUX, news, msgs), a top holding, is a big-cap at $18.9 billion. Hodges doesnt give a prairie-dog burp about market cap; Morningstars pigeonhole contains him about as well as a pair of designer jeans.
Give him Haggar slacks. A Wall Street fashionista wouldnt be caught dead in them, nor patronize the Wal-Marts and J.C. Penneys where they're sold, but Hodges likes their expandable waistband. He also likes the fit of Haggar (HGGR, news, msgs) in his portfolio, where it has advanced nearly 50% in the last year.
Hodges doesnt fit into any investment orthodoxy, except fundamental stock analysis, at which the manager excels. Hodges Fund has a very low R-squared, or correlation with such standard benchmarks as the S&P 500 or the Russell.
A better chance to beat the market
As I explained in last weeks column, funds that have a low R-squared have a much better chance of beating the market than closet indexers. Hodges R-squared is 74% compared with the S&P 500, and 88% compared with the index it tracks most closely, the Wilshire 4,500, which is the overall market minus the 500.
This fund gets its performance from the managers stock-picking, not his tailwind-surfing.
| Hodges Fund top holdings | | Company | Industry | | Commercial Metals (CMC, news, msgs) | Steel & iron | | Lubys (LUB, news, msgs) | Restaurants | | Starbucks (SBUX, news, msgs) | Specialty food | | Costco Wholesale (COST, news, msgs) | Discount retailing | | Corrections Corporation of America (CXW, news, msgs) | Property management |
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Source: Hodges Fund
We go anywhere, buy any size company and any type of company we think will go up, Hodges drawls. We go wherever the stocks are performing.
The result is a portfolio of about 65 names, with 40% of assets invested in the Top 10. The things I like the best are the ones Ill put more money in, Hodges says, and sometimes they get to be a pretty large position because theyve gone up a lot.
Starbucks is up about 28% in the last six months, Corrections Corporation of America (CXW, news, msgs) 30% and Lubys (LUB, news, msgs) 65%. The laggard among the top positions, Costco (COST, news, msgs), is ahead only 9%, but that means it has resisted the markets doldrums. Commercial Metals (CMC, news, msgs) has nearly doubled in the last year.
About the only things Hodges wont invest in are stocks that offend his sense of decency. That includes categories such as alcohol and tobacco, but he doesnt consider the fund socially responsible. He's even more upset about corporate greed and shuns companies he thinks overpay their bosses, such as Walt Disney (DIS, news, msgs).
Nepotism doesnt bother the 70-year-old investor, however, and his eldest son, Craig, 40, is the funds co-manager. Hodges other children also work for his money management operation, which includes a brokerage firm, First Dallas Securities, and an advisory firm, Hodges Capital Management. Together the businesses control about $530 million.
Making a difference
Hodges has no plans to retire, and I learned my lesson avoiding elderly money managers 20 years ago when I failed to buy shares in Berkshire Hathaway (BRK.A, news, msgs) because I thought Warren Buffett was over the hill. Also, Craig Hodges practices the same kind of tire-kicking fundamental stock analysis his father taught him.
Hodges Fund is also that rare no-load fund that actually encourages small accounts -- the minimum investment is $250. Whereas Vanguard Group has a minimum of $3,000 and doesnt roll out the red carpet until youve got a quarter-million on account, Hodges believes small investors benefit the most from expert money management.
Many times with these smaller accounts you have really made a difference in their lives, where with people who are really wealthy, youve just moved the decimal point over, he says.
One of his private clients became his customer more than 40 years ago, when he was a young stockbroker. This lady in Oklahoma, shes in her 80s now, and we send her a check every month to live off of, he says. Its not a big account, but its an important account.
Janet Brown still has Hodges in her Strategy Lab portfolio, but it isnt apt to be there long: Janets usual holding period is no more than six months. Lumpy funds are fun for rapid traders, but they pay the biggest dividends to very long-term shareholders. Just as Hodges likes Texas Pacific for kids and grandkids, I like his fund for the same clientele.
At the time of publication, Timothy Middleton didnt own any securities mentioned in this article.
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