In New Orleans the Friday afternoon before Mardi Gras, it’s hard to find anyone working. People are either at Galatoire’s having a long lunch of shrimp remoulade and trout amandine or home trying on their costumes. So I was surprised and pleased, on very short notice, to be sitting in the office of St. Denis J. Villere and his brother George in the grand old First Commerce Building on Baronne Street. The Villeres were hard at work making money, which they do very well.
I first heard of St. Denis J. Villere & Co. when I was in my twenties, running a little newspaper in New Orleans and getting interested in financial matters for the first time. The firm was known back then — as it had been since its founding in 1911 by the eponymous grandfather of the current St. Denis — as the asset manager of choice for the city’s old families.
Villere manages $1.1 billion in about 400 private accounts held by wealthy individuals, businesses, and institutions. The firm’s stock portfolios have beaten the benchmark Standard & Poor’s 500 stock index for the past four years. Over the past 10 years, Villere’s stocks have returned an annual average of 16.4 percent, compared with 11 percent for the S&P. Villere’s hybrid portfolios — of stocks, bonds, and cash — have whipped their benchmarks by an average of more than four percentage points a year since 1994.
The secret to Villere’s success is combining well-chosen small- and micro-cap stocks with bonds. The result, in recent years at least, is a portfolio that produces returns greater than a stock portfolio alone, but with lower risk or volatility.
You wouldn’t expect someone named St. Denis J. Villere to be a fan of such small-cap stocks as 3D Systems (TDSC) and Petroleum Helicopters (PHEL), each with a market value well under $200 million. In fact, St. Denis is a lot less stuffy and formidable than you might think. Everyone calls him “Sandy,” and his last name, which also graces a street in one of the seamier parts of town and the family plantation, where a famous battle in the War of 1812 was fought, is pronounced to rhyme with “pillory.” What’s truly surprising is that this mild-mannered patrician and his brother — along with Sandy’s son Sandy III and nephew George Young — have brought Villere & Co. to the masses.
On Sept. 30, 1999, the firm launched Villere Balanced (VILLX), a public mutual fund that holds stocks, bonds, and cash — roughly in the same proportion as in a typical Villere private account. The difference is that private accounts require a minimum initial investment of $500,000 while Villere Balanced asks for only $2,000.
Villere Balanced is one of several excellent funds started by successful private money managers who were urged by friends to seek a wider audience for their talents. A prime example is the Torray Fund (TORYX), started in 1990 by Robert Torray of Bethesda, who still runs money for large pension funds as well; it has returned an annual average of 14.3 percent for the past 10 years. Another is Tweedy, Browne American Value (TWEBX), started in 1993 by Tweedy, Browne Co., a Wall Street firm founded in 1920 by Forrest Berwind Tweedy, whose mellifluous name rivals that of St. Denis J. Villere.
In fact, let’s get back to Sandy Villere. He is telling me why he likes small-company stocks. His theory is that large institutional buyers are proliferating, and these buyers have so much money to place at one time that they have to buy stocks with lots of liquidity, that is, large-caps; buying small-caps would push up prices too much with purchases and down too much with sales. So mega-investors concentrate on mega-caps, which, says Villere, get overpriced and over-analyzed.
“Big institutions don’t have any choice, but we do,” he says. Like many other smart investors I have met recently, Villere believes that the reduction in the number of analysts at large firms has meant that fewer stocks are covered, and the ones that Wall Street ignores — mainly small-caps — can become “mispriced.” In other words, the Efficient Market Theory (that every stock is properly priced, according to all possible information at the moment) doesn’t work all the time with small-caps.
Hence, a lovely company called SCP Pool (POOL).
By some definitions, SCP, with a market cap of $1.3 billion, is no longer a small-cap. But it used to be. The price of a share has quadrupled in the past four years, as the company’s profits have soared. “At one point,” says Sandy Villere, “we owned as much as 20 percent of the company.” He has scaled back, but at the end of last year, SCP was still the mutual fund’s seventh-largest holding.
The day I arrived in New Orleans, SCP announced that its sales for 2003 had risen 18 percent over the previous year and that its earnings were up 27 percent. The company is the nation’s largest wholesale distributor of swimming-pool supplies, selling 91,000 different products to companies that service pools and stores that sell equipment for pools. And the pool business is booming. Pools are no longer add-ons but requirements for new houses in the South and Southwest. There is lots of room to grow as the economy recovers further.
The stock, says Villere, “is reasonably priced at 17 or 18 times” this year’s estimated earnings. Even SCP’s current price-to-earnings (P/E) ratio is modest, at 26, for a company whose profit has increased at an annual rate of 23 percent for the past five years. The good news is that the stock has been languishing lately; it has been flat since last fall.
One advantage of SCP is that the Villere family can “visit to see what’s going on” at headquarters, which is across Lake Pontchartrain in Covington. Villere & Co. is a strong believer in character. It wants to own stock in companies run by people who are not merely smart and energetic but blunt and full of integrity. It’s not easy for a small investor to gauge the character of a chief executive; it’s easier for the principals of a billion-dollar money manager that concentrates in small-cap stocks.
Actually, Villere is not exclusively a small-cap house. “We owned Coke [KO],” says Sandy, “but we got out of it when it got too expensive. People were buying Pfizer [PFE] at 45 times earnings. We waited until the stock got to $30 a share. This is the top drug company. Everything about it is wonderful. They have Celebrex and Lipitor.” And now, Villere has Pfizer, which trades at a P/E, based on this year’s expected earnings, of just 16.
But small-caps are where the bargains are. Consider Petroleum Helicopters, of Lafayette, deep in Cajun country. According to Yahoo Financial, no analysts cover the stock. At first glance, it doesn’t look like much. Its helicopters service drilling platforms in the Gulf of Mexico, and business has been sluggish. But the company has been rejuvenated and it is increasing its non-oil business, servicing hospitals and government clients; plus, drilling activity shows signs of picking up. The Villeres, who bought in at a nice price, think the investment is a good bet. (By the way, they tend to be long-term holders of stocks. The fund’s turnover is only 38 percent annually, about one-third the rate of the average fund.) A more conventional value stock is Gulf Island Fabrication (GIFI), which makes drilling platforms. The company, based in nearby Houma, has been boosting its earnings sharply, yet it trades at a forward P/E of just 14.
Villere & Co. may have ancient roots, but it doesn’t avoid modern companies. It holds such high-tech stocks are Cerner Corp. (CERN), which sells software to health care firms; 3D Systems, maker of complex imaging systems; and Luminex Corp. (LMNX), which makes testing products for the life sciences industry.
Then there’s American Italian Pasta (PLB), a superbly run company that has decided to join the low-carb revolution, not simply compete against it. The firm makes a pasta certified by the Dr. Atkins folks “that’s going out the window.” American Italian stock is down about 10 percent since July and trades at a forward P/E of just 14.
Villere Balanced attempts to be a broad portfolio in itself. Right now its holdings comprise 66 percent stocks, 26 percent bonds, and 8 percent cash. That’s about average for the fund. The question is whether the allocation is right for you. If you’re in your twenties or thirties, you will definitely want to own more stocks than that. The Villeres know this, and they are thinking of adding an all-equity fund to their small family. For a typical investor of about 55 years old, the Balanced allocation seems about right.
Of course, it’s a good idea to own more than one mutual fund, and if you are younger, you can bulk up on all-equity funds (or stocks, for that matter) while, if you are older, you can own more bond funds or bonds to balance out Villere Balanced.
The fund’s three-year track record is exceptional. It ranks in the top 7 percent of all balanced funds with an annual average return of 5.5 percent, beating the S&P by nearly seven percentage points a year.
What’s surprising is that Villere Balanced is so small: only $17 million in assets. Admission to this exclusive club is free (there’s no load), and the annual expense ratio is 1.5 percent. That’s a little higher than the 1.3 percent average but still an awfully good deal — as long as Villere & Co. keeps doing what it’s been doing for the past 93 years.