Texas Mutual Funds, Their Managers Doin' Just Dandy, Partner
The Dallas Morning News
February 1, 1994

“Yes, I did feel a little insulted,” Sam Wyly said over lunch last Friday.

The source of the insult was a headline in the Texas Journal section of the Wall Street Journal:

“Texas Mutual Funds: Returns Are In. And They're Lousy, Thanks to High Costs and Scarcity of Talent.”

That's what people call the broad-brush approach.

Based largely on information from Lipper Analytical Services, a New York firm that tracks mutual fund performance, the article went on to say that many Texas funds were relatively small and had underperformed major indices because of high operating costs and lack of investment talent.

Mr. Wyly, who was not seriously aggrieved, is best known as the founder of University Computing and Sterling Software as well as controlling shareholder in Michaels Stores. His most recent activity has been the creation of Maverick Capital, a hedge fund that grew out of family investments. In 1993, the fund provided a gross return of 86 percent and a net return, after a 1 percent management fee and a 20 percent of profit fee to the managers, of 67.3
percent.

For an investor in Texas, the investment-challenged state, that's a rather nice return. I expect it would be gratefully accepted by discerning investors in New York or even the tasteful investors of Boston, two locations that regularly insist there is no intelligent life west of the Hudson River. They believe this even as they write checks to pay taxes Texans have been too slow-witted to invent.

In fairness, Mr. Wyly's fund is not your ordinary, garden-variety mutual fund that you can get into for $2,500. For Maverick, you need to be what the SEC calls a "qualified investor,' a notion that boils down to being able to write a very large check or having a very well-stuffed pay envelope. Hedge funds can be long, short, margined, optioned, hedged, cross-hedged -- whatever weird stuff turns their managers on.

Right now, for instance, Mr. Wyly likes the returns on ESKOM bonds, the government-run electric utility of South Africa. That country, he points out, doesn't look nearly as dangerous as it once did, given upheavals and global debt. Indeed, with Californians now saying they have four seasons -- fire, flood, rain and riot -- it's kind of hard to get worked up about how safe and orderly we are here in America. Mr. Wyly has had some scary months while investing in foreign sovereign bonds and may have them again. But it's unlikely his investors or
grandchildren have complained.

Some other, less esoteric examples of Texas money managers who regularly do quite well for their clients?

Consider FPA Paramount. With a total return of 20.53 percent in 1993, this growth and income fund is in the top 6 percent of its peer group, according to Morningstar, a Chicago firm that tracks mutual funds. Nor was this a one-shot deal: the fund ranks in the top 3 percent over the past 15 years.

If you look up the headquarters for FPA Paramount you will learn that it is Los Angeles. The manager of the fund, William Sams, lives and works in Dallas. Always has, always will. He refuses to leave Dallas, gets nervous when he goes beyond Waxahachie. Prefers tornadoes to earthquakes. Just ask him.

Try Vanguard Windsor II. Like FPA Paramount, the fund company is not in Texas. Vanguard is in Valley Forge, Pa. Barrow, Hanley, Mewhinney, and Strauss, a Dallas investment advisory firm with the press beliefs of a Philadelphia gentleman (one's name should only appear in print upon engagement, marriage or death), manages $5.5 billion of this $7.5 billion fund. In 1993, the fund had a total return of 13.6 percent, putting it in the top 28 percent of all growth and income funds. During the past three years, it was in the top 22 percent; in the top 39 percent
over the past five years.

As you have already guessed, a mutual fund company can be located in one place and a fund manager in another. It isn't widely appreciated, for instance, that $66 billion of the $260 billion under management at Fidelity Investments, a Boston fund company, is managed from Irving, Texas, the headquarters for Fidelity Southwest. While these funds are money market and municipal bond funds, not equity funds, it's a large lump to have under a wrong address.

Take a look at AIM Charter. The AIM Family of funds is headquartered in Houston, but the fund is run by Julien Lerner in Dallas. Has been for 26 years. Mr. Lerner's $1.6 billion fund hasn't had a good run in the past two years, but it still managed to rank in the top 4 percent of all growth and income funds over the past five years.

Ironically, one of the most interesting mutual fund stories is the on-going turnaround and growth of United Services in San Antonio.

Although the firm has small funds and some high expense ratios, it has consistently expanded its offerings since its new CEO and major shareholder, Frank Holmes, took charge and started to move the firm away from its position as a gold and gold-shares fund company. Its money market fund, United Services Government Securities Savings, has been the top-yielding fund for 37 months and now yields 3.25 percent.

The average government-only money market fund yields 2.58 percent.
According to Michael Lewis, author of Liars' Poker, the definition of hell for recruits at New York's Salomon Brothers was being assigned to “equities in Dallas” after training ended.

Maybe so. But one of the time-honored tools for distinguishing talent is knowing to come in from the rain. Locating in Texas is a good start.