The Secret to beating Wall Street

Acker Beats 94% of Equity Peers Shunning Manhattan

By Matt Walcoff - Apr 12, 2011

Brian Acker, the Toronto-based manager of a fund that buys large U.S. companies and beat 94 percent of peers in the past year, says he’s found the secret to beating Wall Street: staying away.

Acker, whose Acker Finley Select U.S. Value 50 Fund has returned 31 percent since the end of 2009, says being about 560 kilometers (350 miles) from the New York Stock Exchange keeps him away from the buzz of corporate news that could throw off his quantitative strategy, which relies on statistical analysis to pick shares.

“Everyone wants to get on the hottest stock, the hottest news, and I think returns from that are marginal at best,” Acker, 51, said. His company manages about C$560 million ($586 million). “The market is wired in such a way, all the advantages are gone from the floor being close,” he said. “The farther away, the better.”

Among 205 funds that purchase the biggest American companies from outside the U.S., only three have gained more since April 2010 than the Select U.S. Value 50 Fund. Among 85 large-cap funds based in Canada, only the Montrusco Bolton Quantitative Canadian Equity Fund (MONTBQCE) had a higher return in 2010.

Acker, the chief executive officer of Acker Finley Inc., achieved the returns even though the fund had more invested in technology and health-care companies than in other industries. Those groups lagged behind the rest of the U.S. stock market over the past year.

Value Stocks
The C$47 million fund focuses on value stocks, or companies with low share prices in relation to earnings. U.S. large-cap value stocks have lagged behind growth stocks -- or companies with the fastest profit increases -- over the past year, according to Russell Investments indexes.

Acker bought stocks such as Woonsocket, Rhode Island-based CVS Caremark Corp. (CVS), the largest U.S. provider of prescription drugs, as well as Redmond, Washington-based Microsoft Corp. (MSFT) and Walgreen Co. (WAG) of Deerfield, Illinois, the biggest U.S. drugstore chain. He invested in the companies following declines and sold before they declined again.

He bought Microsoft, the world’s largest software maker, for $24.65 a share in October and sold it at $27.81 on Jan. 4. Microsoft has fallen 6.9 percent to $25.98 in 2011.

Acker uses a formula when choosing stocks, calculating a “model price” for each Standard & Poor’s 500 Index company based on three factors: “intrinsic business value” or what its balance sheet says about its ability to generate profit; how likely the balance sheet is to be affected by changes to the share price; and projected earnings growth.

Ranking Companies
He then ranks the largest 100 companies and the other 400 companies in the S&P 500 by how much they would have to gain to match their model price. The 10 or so highest-ranked companies from the first group and 40 highest-ranked companies from the second group are added to or kept in the fund.

His biggest holdings include Houston-based Marathon Oil Corp. (MRO), an oil producer, New York-based MetLife Inc. (MET), the largest U.S. insurer, and Whitehouse Station, New Jersey-based drugmaker Merck & Co. The fund has a minimum investment of C$150,000 for non-accredited investors.

Acker said he doesn’t stray from companies that are in the S&P 500 and has ruled out adding large-cap companies such as Transocean Ltd. (RIG), the offshore driller, and Kinder Morgan Energy Partners LP (KMP), a pipeline company, that are ineligible for the index.

‘Holier Than Thou’
“What I see constantly that drives me crazy is people say they beat the S&P 500, but they don’t have S&P 500 companies in the portfolio,” he said. “I don’t want to sound holier-than- thou, but I have a perverse feeling of satisfaction that I can actually beat the S&P 500 with S&P 500 names.”

The fund added Freeport-McMoRan Copper & Gold Inc. (FCX), the world’s largest publicly traded copper producer, in early March, when it was trading at about $52 a share. Acker’s model came up with a valuation of $79.27 for the Phoenix-based company. Acker said other investors have probably driven down the shares amid speculation Chinese economic growth will slow, curbing demand for metals.
“We don’t make any macro guesses,” Acker said. “We invest the way we invest all the time.”

Acker said he plans to reinvest in Microsoft over the next month because his model price is 47 percent above the software company’s current share price. The stock has fallen 10 percent since Jan. 27, when the company reported second-quarter unearned revenue, a measure of multiyear contracts, below the average analyst estimate.

Intrinsic Value
Microsoft’s balance sheet indicates the shares have an intrinsic value far higher than the current market value, he said. Microsoft has 19.95 cents in debt for each dollar of equity, 21 percent less than the S&P 500 Information Technology Index as a whole. The company had $4.02 billion in cash on Dec. 31.

Acker said he’s not the only investor who recognizes that Microsoft shares are undervalued.

“People aren’t really missing it, it’s just that no one really cares,” he said. “Everyone’s turned into a momentum guy. Unless the stock hits a three-month high or a six-month high, no one’s ever going to look at it again.”

The strategy hasn’t always worked. During the 2007-09 bear market that was the worst worldwide slump since the 1930s, the fund declined 73 percent, compared with a 55 percent drop for the S&P 500. Acker blamed the underperformance of value stocks during the period. Before the S&P 500 reached its peak in October 2007, the fund had outperformed the equity benchmark 10 out of 14 quarters.

Away From New York
While Acker may benefit from his location, other fund managers aren’t taking advantage of their distance from New York.

Among 4,363 actively managed mutual funds with at least $150 million in assets and specializing in U.S. stocks, those with managers based in New York averaged an 18 percent return over the past year. Funds run by managers elsewhere in the U.S. averaged a return of 17 percent, while funds with managers based outside of the U.S. returned 12 percent, on average, according to Bloomberg data.

Acker, who co-founded his company with the late Joe Finley in 1992, said he can’t say why other managers outside of Manhattan have not matched his success.
“I’m sure there are times it’s beneficial to be outside New York, and I’m sure there’s times there’s benefit to be inside,” said Acker, who was an accountant at Clarkson, Gordon & Co. and later a broker at Canadian Imperial Bank of Commerce’s Wood Gundy unit before starting Acker Finley. “We pride ourselves on not talking to the Street and knowing what other people do.”

After having run the U.S. fund for more than seven years, Acker said he has it down to a science and does little tinkering. That leaves him free time.
“I do a lot of golf,” he said. “A lot of our day-to-day work is client relationships, and we let the system do its work.”