Successful investors like consistent performance, and the ability to return performance through storms and good times alike is a confirmed habit of Jim Barrow, adviser to Vanguard’s Windsor II large-cap value fund. Since 1985, the Windsor II fund has returned an average 12.94 percent a year. Last year Barrow beat his own average, returning more than 13 percent to investors, compared to 10.8 percent for the Dow Jones Wilshire 5000 Index.
Barrow, 66, started his investment career in 1965 after leaving the University of South Carolina with a BS in finance. He has little time for short-termism, be it daily market chatter or Fed speculation. I ask him at the start of our interview if, given the imminent release of the minutes from October’s Fed meeting, he’s watching for clues to future US interest rates. His growled response is short and to the point: ‘It’s all about the stocks.’Well, absolutely.
But Barrow opens up when I query him on his relationship with IROs and senior anagement at portfolio companies. ‘We generally hold stocks for some time and we take pretty sizeable positions, so getting information isn’t usually that difficult,’ he says. ‘But it is interesting how the market has changed in the last eight years. When we used to initially ask management for information, their usual response was sure, but now their first reaction is no. There’s just so much shortterm money out there that’s not focused on the business, and too many people trying to figure out what the next quarter results will be like.We buy stock to find out how much it will earn in two years.’
Back to basics
Barrow’s Dallas office has no PC on the desk or monitors giving constant stock updates, a product of thrift and old-school toughness. His priority is finding companies at low earnings multiples, beaten down but with good management and a strong asset base to keep everything belted – a classic value approach. He also takes a keen interest in how tax-effective a company is.
What’s been preoccupying Barrow recently is politics: Bush’s new vulnerability and how potential Democratic regulatory change could affect stocks. ‘There’s a lot of turmoil out there,’ he remarks. ‘During the election phase a lot of things get said that may or may not come to fruition, so we’re talking to companies about potential regulation change.’
Take Sallie Mae, the governmentsponsored loan company with $130 bn on its books. Democrats could cut loan rates, which obviously could hamper returns, but then there’s talk of federal government expanding borrowing limits.
Another stock giving Barrow pause is Illinois Tool Works (ITW), which could potentially be hit by the continuing downturn in the US car industry due to stiff foreign competition, especially from the Japanese. ITW is in the doghouse – just the kind of stock Barrow’s partial to. ‘It’s a tremendously run company that has demonstrated real substantial revenue growth and earnings. It’s got a pristine balance sheet – a real cash generator,’ he says. ‘There are big concerns about the US auto market, but when we talked to the company, we got a lot of specifics. Forty percent of their business is international – and non-domestic car makers are building here fast.’ The market has driven the stock down to a ten-year low on a straight P/E basis.
Barrow places much stress on eyeballing management and meeting IR regularly. Unfortunately, too many IROs in the job are making a transition and don’t stay put in the chair for long enough, he says: ‘The really good ones will have been there for a while and see the job as an end in itself. Where we often don’t get proper help is from fairly junior IROs.’ The complaint is a common one from fund managers. They’re happy when the IRO function is taken seriously, but don’t like it if they get the sense that personnel are being rotated too quickly through the job.
Storm-proof stocks
Although Barrow’s track record is impressive, he also inevitably takes on disappointments; not all his stocks are storm-proof. ‘We’ve been a big holder of Bristol-Myers Squibb. It hasn’t done too well, but we continue to hold it because the fundamentals remain OK. It’s got a wonderful pipeline of product in the long term. The management is new so the company’s still got a lot of upside, and it’s still paying a decent dividend.’
This is what Barrow loves: dividends, proper returns, real products and demonstrable cashflow. And his Buffetesque attitude is reflected in his basket of other medium and large stocks: Kmart, Pfizer, Altria. Hardly cutting-edge investments, but you can bet shareholders in his fund aren’t complaining. Nor are they worried about Barrow’s running costs, which verge on the ridiculously low: last year his fund’s total expense ratio (TER) was just 0.35 percent, compared to an average large-cap value fund TER of 1.41 percent.
Barrow’s success, he says, is just a matter of being very disciplined and focused on the things that matter. ‘All good investors,’ he says, ‘are disciplined and have rules that they don’t break, which keeps them out of trouble. A good value investor can beat the market, but the average investor hasn’t a chance because they usually try to do a little of everything.’
Passive activist
What is Barrow’s take on corporate governance? How much of an activist shareholder has he become, post-Sarbanes? ‘Good companies,’ he says, ‘have higher multiples; this is truly reflected in the price of the stock, and we tend to vote on those issues that we think affect shareholders: super-voting shares, huge pay packets, golden handcuffs.’
But with all the recent shareholder activism – not to mention reams of press coverage – surely the governance picture is broadly improving? ‘Yes, it is getting better when you see the mutual fund industry now voting with shareholders’ interests in mind,’ Barrow says. ‘At Vanguard we’re definitely activists and don’t always vote with management. A lot of big operations don’t vote in the interests of shareholders; most of the big index funds tend to vote with management. It’s less trouble to do that, but we hold them accountable.’
Corporate scandals like options backdating continue to hog the headlines, however. Barrow agrees it’s almost impossible to predict what will hit the investment industry next. ‘A year ago no one thought about backdating. It’s the lure of easy money, and it has a very strong appeal. It’s all about money,’ he says, laughing for the first time in the interview. ‘I think this issue could run for a couple of years, but you’ve got to send more people to jail for it. That’s what gets people’s attention: jail, not fines.’
Barrow is now retiring, or at least promises to within four years, before he hits 70. No successor has been named, but he or she will be from Barrow’s own independent consultancy, Barrow, Hanley, Mewhinney & Strauss, to which Vanguard outsources the management of some of its funds. Whoever it is, they’ll have some huge shoes to fill.
