O’Brien Greene’s investment philosophy is straightforward: the long-term preservation and growth of our clients’ assets through good and bad markets. Our investment team crafts individualized portfolios of high-quality stocks and investment-grade bonds. We manage each separate account in light of the client’s distinctive tolerance for risk and investment objectives, rather than trying to beat the artificial standard of market indices.
The principle that animates O’Brien Greene’s investment management is stewardship. We steward our clients’ wealth as if it were our own, and we invest our own savings alongside our clients’. We do not accept commissions or revenue sharing of any kind from brokers or banks; our only product is the management of investments, for which we charge a single, competitive, and transparent annual fee. Our relatively small size allows us to provide an unusually high degree of personalized service that is unavailable from large institutionalized firms, and our diverse range of clientele—from individuals, families and trusts to endowments, retirement plans, and insurance companies—gives us an investing perspective that is uncommonly broad.
Growth and Value Stocks
We typically invest the equity portion of a portfolio in 25 to 30 stocks chosen by our investment team for their strong fundamentals: an attractive valuation, strong cash flow, low debt, stable and growing earnings. Furthermore, we favor companies whose products and services have a durable advantage within their marketplace and whose managements have proven leadership ability and a demonstrable commitment to increasing long-term shareholder value. We diversify each portfolio’s stock holdings across the major sectors of the U.S. economy. Although we have a preference for large-capitalization stocks, we may supplement portfolios with exchange-traded funds (ETFs) and alternative asset classes such as publicly-traded real estate investment trusts (REITs) and master-limited partnerships (MLPs). Our investment team monitors our clients’ holdings continuously and reviews each portfolio on a quarterly basis, re-balancing stock positions as needed. We typically keep the size of each stock to no more than 5% of assets. The turnover in our portfolios is low, usually 25% a year at most, which keeps trading costs negligible, maintains tax efficiency for taxable accounts, and maximizes long-term appreciation.
The fixed-income portion of each client’s portfolio is comprised of individual bonds with investment-grade ratings of “A” or better. We choose from among corporate, municipal, and agency bonds in order to identify which class offers the most attractive value for each client’s income needs and tax situation. Because we look to bonds primarily to provide a stable return of principal, rather than a return on principal, we generally avoid high-yield or “junk” bonds and exotic debt instruments such as asset-back derivatives, which can be difficult to understand or value. At O’Brien Greene, we believe that prudent investors should always know what they own and why they own it.
We compare the current ratio of stock earnings to corporate bond yields with the historical record of that ratio over the last sixty years. This comparison informs our judgment that stocks are a better value than bonds, or vice versa, and what asset allocation between equity and fixed-income fits each client’s needs. This discipline relies on reported historical relationships and not speculative forecasts. We also consider a client’s tax, legal and income requirements in recommending an appropriate allocation.
Ensuring Tax-Efficiency & Avoiding Excessive Trading
Tax efficiency is important for personal or after-tax portfolios. Here, the manager of a portfolio of individual stocks and bonds can determine if, when, and how, he takes profits and losses in the portfolio, which in turn determines the capital gains taxes paid in a given year. The result of tax efficiency is, over time, less taxes paid and greater investment returns. O’Brien Greene customizes the tax efficiency of each portfolio because each portfolio has only one owner, and we know the owner’s tax situation. Such customized tax efficiency is not possible with a mutual fund. Furthermore, O’Brien Greene engages in relatively little buying and selling, which is called portfolio turnover. The average annual portfolio turnover at a stock mutual fund is about 100%, while the figure at O’Brien Greene is typically less than 25%. High turnover drives up transaction costs, and over the long term, yields few benefits.
O’Brien Greene tends to participate in international markets indirectly through the activities of the U.S.-listed companies we invest in on our clients’ behalf. (About 40% of revenue from companies included in the S&P 500 Index comes from their operations outside of the United States.) Thus the firm might own the common stock of Coca-Cola, for example, which has extensive operations around the world, but the firm would not set out to own the stock or the bonds of an independent soft drinks company whose stock was listed on an Asian or South American exchange. When our investment team does decide to purchase the stock of a non-U.S. company, it is typically from among those foreign firms that list American Depository Receipts (ADRs) on the New York Stock Exchange or Nasdaq.
There are several reasons for our focus on stocks that are listed on U.S. exchanges. One is to minimize foreign currency risk. Another more important reason is regulatory oversight and market liquidity. The U.S. has extensive and effective securities regulation, along with unparalleled trading volume on its main public markets. Also, American accounting standards, which are predicated on accuracy before all other values, are perhaps the most dependable in the world.
Our favored direct approach to international investing is through the use of transparent, low-cost, and tax-efficient exchange traded funds (ETFs), which we use to complement our core stock holdings with a small allocation. In selecting appropriate international ETFs, we may target countries with faster growing, more stable economies, or choose an ETF constructed to give exposure to attractive stocks in a region or currency zone such as the eurozone.
O’Brien Greene Small-Capitalization Stock Fund, L.P.*
O’Brien Greene’s investment team has managed the O’Brien Greene Small-Capitalization Stock Fund, L.P. as general partner on behalf of its limited partner shareholders since the Fund’s inception in 1993. The objective of the Fund is the long-term appreciation of its partners’ capital through investments in the securities of small-cap companies, which generally are not included in the S&P 500 Index. The availability of limited partnerships in the Fund is restricted to “accredited investors,” as defined in Regulation D promulgated under the Securities Act of 1933.
*The following description is for informational purposes only and does not constitute a solicitation or advertisement.
Why Not Just Invest in Mutual Funds?
Over the past 40 years O’Brien Greene & Co. has generally avoided buying stock and bond mutual funds for its client portfolios, except in a few cases. Instead we have invested primarily in individual stocks and bonds. We believe that owning assets directly, rather than indirectly through funds, is the best way to generate income for our clients, to preserve the purchasing power of their savings from inflation, and to make their capital grow over time. Mutual funds are useful for diversifying relatively small amounts of money in the pursuit of these objectives, but for sums large enough to achieve diversification on their own, the drawbacks of mutual funds tend to exceed their benefits. These drawbacks are summarized below:
There are thousands of stock and bond mutual funds. Indeed, there are more mutual funds than there are individual stocks and bonds. The internal workings of each mutual fund is different, and each with numerous different share classes that have variable and changing fees. While fund prospectuses are supposed to disclose the fees, penalties, charges and risks of each fund, the prospectuses are long and hard to understand, even for investment professionals. We think the time and effort required are more productively spent on the analysis of individual stocks and bonds. They are the source, the basic building blocks, of wealth management. Unlike funds, stocks and bonds don’t charge any fees to own them, but rather pay their owner in yields, dividends, and price appreciation.
Tax & Trading Inefficiency
A mutual fund’s capital gains tax liabilities are distributed among all its shareholders, so mutual fund shareholders are liable for the capital gains of other fund investors who decide to sell their fund shares. Therefore, a mutual fund shareholder can incur tax bills while others redeem their shares, even though the shareholder may own the fund at a loss and intend to hold on to his shares for the long-term. Furthermore, longer-term mutual fund shareholders bear and effectively subsidize the trading costs generated by the speculative traders who arbitrage in and out of funds. The demand for mutual fund managers to meet the unpredictable, daily redemption requests from their disparate shareholders also tends to hurt investment performance over time. According to a recent academic study reported by Barron’s, the average separately managed account outperformed the institutional class shares of the average mutual fund by 0.62 of a percentage point annually from July 2000 through December 2010 (Lewis Braham, “Don’t Believe All Mutual Fund Returns,” Barron’s, July 4, 2014).
Many mutual fund providers treat the funds they offer primarily as retail products to be sold to investors, rather than as a collaborative means to stewarding wealth. This retail orientation is borne out in the surprisingly high number of mutual fund managers who do not invest their own assets in the funds that they manage and sell to investors. Almost half of the 7,700 funds tracked by Morningstar are run by managers who do not invest any of their own money in their funds, and thirty-five percent of stock mutual funds have managers who do not invest in their own funds (cf. Sarah Max, “Fund Managers Who Invest Elsewhere,” Barron’s, July 12, 2014). This fact should make investors wary, since they would no doubt avoid investing in a company whose CEO lacked any ownership stake in the enterprise. At O’Brien Greene, the members of our investment team invest their own assets alongside our clients’.
High Mortality Rate
The average mutual fund is not suited to long-term investing, because many mutual funds close or are merged with other funds relatively soon after they are founded. The relatively high mortality rate among mutual funds also leads to a “survivorship bias” in fund performance data. That is, the investment performance of various categories of mutual funds over a given time period is significantly weaker when closed or merged funds are accounted for, in addition to the funds that survive throughout the period.