Diversification is protection against ignorance. It makes little sense for those who know what they’re doing.” These words, once uttered by Warren Buffett, are blasphemy to anyone following modern portfolio theory–the widespread practice dictating that investors own a diversified portfolio of stocks. For most financial advisors Buffett’s statement is downright insulting.
But for Daniel Miller, the brash and boyish 32-year-old portfolio manager of the Gabelli Focus Five fund, Buffett’s words are the gospel of superior performance. His budding mutual fund is what value investors refer to as a deep value concentrated portfolio. According to its charter, Miller is allowed to invest up to 50% of its assets in his five best ideas.
So far Miller’s swing-for-the-fences approach to stock picking has produced big results. Since he started managing the fund 16 months ago it has gained 46.5%, compared with a total return of 36.2% for the S&P 500. Assets have swelled from $5 million to $230 million in a little over a year.
Miller’s success is no flash in the pan, either. The idea for the Focus Five mutual fund came out of a research report he published at Gabelli & Co. as head of institutional equities starting in January 2006. Each quarter the Focus Five research report gathered best-idea stock recommendations developed by the firm’s research team and selected five stocks trading at least 30% below their private-market or takeover value. As a rule, every one of the five was required to have a near-term catalyst that would drive its price higher, and no stock could remain in the portfolio for more than six months.
Here, for example, is a Focus Five pick of January 2008: Take-Two Interactive Software, which makes the Grand Theft Auto series of videogames. In the three-month period Gabelli recommended the stock, Take-Two gained 84% thanks to a takeover bid from Electronic Arts. The bid was ultimately dropped, but by then Miller’s research service had removed it from its list.
Picks like that made Gabelli’s Focus Five report popular among clients. Over six years through the end of 2011 these stocks trounced the broader market, returning 224.6%, compared with a 0.1% decline for the S&P 500. The Focus Five mutual fund, launched in January 2012, mimics its high-octane strategy.
“[Staking Dan] was not like bringing somebody in from the sell side and saying, ‘Now that you’re running money, we’ll see,’” says Mario Gabelli.
One big difference between this no-load mutual fund and the research report is that Miller insists on direct access to top management, with whom he talks regularly. He can also hold stocks longer and looks for a catalyst within 18 months. Focus Five, however, is run more like a hedge fund than anything out of the Buffett school of value investing. Miller’s 29-stock portfolio has an expense ratio of 1.7% and a turnover rate of 39%, versus 16% or less for other concentrated funds like Sequoia Fund and Third Avenue Value fund.
Patience is a virtue for run-of-the-mill value investors, but it is not something that young Miller subscribes to. The ginger-haired Gabelli protege exudes the vibe of an Ari Gold rather than a Benjamin Graham.
On a sun-splashed May afternoon he pulls up to the Rye, N.Y. train station in his gray Jaguar XF to take a reporter on a short ride to the Gabelli office, a two-story building off I-95.
Miller mentions that he has Hollywood connections. His younger sister Lauren Miller is an actress and wed to the comedic star of Judd Apatow’s gang, Seth Rogen. Dan has already used his connections to earn some goodwill among his money management friends. About two years ago his sister was trying to get funding for a movie she had co-written, For a Good Time, Call…, about twentysomethings driven to start a phone sex service. But when the initial financing fell through, brother Dan stepped in to help. “I knew nothing about the movie business, but I know how to raise money,” he says. After some calls to friends and colleagues, he was able to raise $1.2 million, and the movie was filmed in 17 days.
At the Sundance Film Festival in January 2012 it wound up being the second-biggest sale of the festival, reaping $2.5 million from distributor Focus Features, a subsidiary of NBC Universal. Despite its ultimate failure at the box office, executives at Gabelli profited handsomely, as did money manager friends like Bill Priest, the chief executive of $27 billion (assets) Epoch Investment Partners. “I think Dan has a nose for money,” says Priest. “You don’t get that from school.”
In fact, Miller makes up for his lack of Ivy League pedigree with an abundance of ambition. Born on Long Island but raised in Lakeland, Fla., he is the son of a plant manager and a schoolteacher. He started investing at 13 after he attended a stock market camp at the Breakers Hotel in Palm Beach.
In high school he was a member of the Future Business Leaders of America club. After getting a tour of the University of Miami‘s undergraduate business school from its dean, he applied for early decision, got in with an ample scholarship and majored in finance. Miller interned at Lehman Brothers for two summers and, during his senior year, became student representative to the university’s board of trustees. This got him invited to a meeting with several of the investors managing the university’s endowment, including Mario Gabelli.
The meeting helped Miller land a job in Gabelli’s operations department after he graduated, and eventually he was asked to revive the firm’s institutional equity sales operation. By the end of 2005, just three years on the job, he was leading the firm’s morning research meetings, where ideas were discussed.
No comments:
Post a Comment