Mr. Farr: Farr, Miller & Washington is a conservative large-cap investment management firm in Washington, DC. We manage money for both individuals and institutions. About two-thirds of our assets are managed for high net worth individuals, with the remaining third of our clients comprised of various institutions including endowments, foundations and Taft-Hartley accounts. We run a fairly concentrated portfolio consisting of 30-40 stocks. Our approach is bottom up. We rely heavily on fundamentals and we need to see above-average earnings growth as a precondition for every stock we consider. We also manage bonds and we have a Small/Mid-Cap portfolio as well. So we have a fairly broad traditional product offering. When the consultants come in and review our performance, they show that our composite of fully-discretionary accounts has historically gone down roughly 80% as much as the market on average in down markets, while going up slightly over 100% on average in up markets. Therefore, we have historically added the most value in weaker markets. This approach reflects our overriding objective, which is capital preservation for our clients. This approach has also led to strong relative performance over short and long periods of time, and we've beaten the S&P 500 over the past one, three, five, seven, ten years, and since inception. For the trailing four quarters ended June 30, 2009, we ranked in the top 3% of all large-cap growth managers, according to the PSN Enterprises Database of large-cap growth managers.
TWST: Back to the question that everybody wants to know how money managers have
been doing over the last 12 months with all the turmoil in the markets, and the
volatility, and so on. So how has that impacted your investing?
Mr. Farr: I do not believe it has impacted our investment process, our
philosophy or our discipline whatsoever. It has certainly been an awful time for
investors. The sharp market sell-offs and unrelenting volatility have tried our
collective souls, and it has not been a year that we would like to repeat.
However, we have a clearly defined investment process that relies on a strict
discipline, and this process has led to consistently strong performance for our
clients. We invest only in companies that we fully understand, and we place a
heavy emphasis on things like balance sheet strength, free cash flow generation
and management experience. These are the attributes investors seek in difficult
economic environments, and so it should come as no surprise that our clients
have held up so well over the past 18-24 months. Since the market lows in
March, the major indices have rallied back over 50% in a very short period of
time. As the rally has progressed, it's occurred in lower quality names,
meaning that companies that have non-investment grade bond ratings have done
much better than the A, AA, and AAA credit quality companies. Therefore, it's
been a low-quality rally and it continues to be a very perplexing environment.
Nothing feels particularly normal, and as I go back over my 20 plus years in
this business, it's very difficult to find familiar touchstones that I can use
as guides for making decisions today. Our sense is that the euphoric state of
relief that is driving lower-quality companies into the stratosphere will
eventually lead to a rotation into the higher-quality names that we typically
hold at Farr, Miller & Washington. So while we remain ahead of the S&P 500 for
the year, we believe we are well positioned for more meaningful outperformance
as investors begin to more fully appreciate the challenges facing the US economy
and, in particular, the US consumer in the coming years.
Tickers included in this excerpt: GOOG, JPM, MSFT, MYL, PDCO, WMT
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