Thank You John Neff: Remembering a Mentor

Many times over the past twenty years we have discussed our mentors, those great investors who have influenced our thoughts, opinions, methods, techniques, stock selection and portfolio construction.  We’ve shared the words and writings of Benjamin Graham, John Templeton, Marty Whitman, Bernard Baruch, Philip Fisher and so many others who deserve our thanks. 

On June 4th of this year, one of our mentors, John Neff, passed away in his adopted state of Pennsylvania.  Neff managed the Vanguard Windsor Fund from 1964 through his retirement in 1995.  I first learned of his existence and the Windsor Fund from an individual I was attempting to solicit as a new client.  I was a relatively newly registered representative, and I did the best I could to find some information about the Fund and its manager.  As a naive young man a bit too trusting of my superiors, I mentioned the Fund to a gentlemen in charge of mutual fund distribution at my firm in hopes that he would share his thoughts.  This wasn’t a very good idea on my part, because his opinion was that the Windsor Fund, and any other fund that was offered at no or reduced commissions, was going to destroy the business.  He followed this comment with a stern reminder that my job was to sell and that the best investments to sell were those recommended by the firm.  Of course this reprimand just encouraged me to further investigate the Fund.

John Neff was born and educated in Ohio.  His first venture into investing was as an analyst at a bank in Cleveland.  This basic training, and I assume some success in stock selection, gave him the desire to apply those skills with a bit more freedom than allowed under the prudent man rules of a bank trust department.  It just so happened that a little mutual fund company was in need of an individual to revive a fund with a not so great record of performance.  That little company was the Wellington Management Company.  The year was 1964, and the fund was the Windsor Fund, with total assets of $75 million.  When Neff retired 31 years later, the fund had total assets of $13.7 billion, one of the largest in the country. 

Over those 31 years, the Windsor fund outperformed the S&P 500 for 23 of the years.  The average rate of return was 13.7% versus the 10.6% average for the index.  If one had invested $10,000 in the Windsor Fund under Mr. Neff’s management and held onto it for those 31 years, he or she would have turned that investment into $537,271.  The same investment in the index would have grown to $227,200.  Those results place Neff into the legend category of money managers.

Good performance created the legend, but his common sense and sincere approach to managing a portfolio for individual investors is what drew him into my circle of influencers.  In an interview conducted by Bill Griffeth on June 15th, 1994, reprinted in Mr. Griffeths’ book, The Mutual Fund Masters, Mr. Neff was asked if he changed his style of management when the Windsor fund switched from load to no-load status.  Here is his reply:

No. No, we’ve always managed the fund for shareholders, and I don’t mean to say that other people don’t.  We’ve always felt we represented a shareholder who obviously wanted to make a nickel, but he also didn’t want to lose his tail or expose himself inordinately.  We try to manage for somebody who wants to stick his neck out a bit and take a risk and kind of grind it out the hard way.  But he also doesn’t want to get killed by an unfortunate turn of events.

These words might just have been our own. 

In the same interview a discussion came up about how he managed his own funds.  This may not be important to everyone, but if you are turning your funds over to someone to make the day to day decisions on your savings, knowing the answer to this question doesn’t hurt.  Here are a few words from Mr. Neff on the subject:

Also, I don’t own anything that’s not owned by the funds.  You might say that sounds kind of crazy, but the thought there is that essentially my time belongs to the fund.  And you know that as cheap as I am I wouldn’t buy anything myself unless I spent some time on it.  And that time belongs to the fund.

As we have said many times, every security we purchase on behalf of our clients, I also purchase for my personal account.  Yes, some may consider this crazy, but just as Mr. Neff said, I am cheap and my time belongs to our clients.  At least it is known that I am going to be paying attention to our security holdings.

John Neff retired from the day to day management of the Windsor in 1995.  A few years later his book, John Neff on Investing, was published.  From the book:

Windsor was never fancy, fad-driven, or resigned to market performance.  We followed one durable investment style whether the market was up, down, or indifferent.  These were its principal elements:
          -Low price-earnings (p/e) ratio.
         -Fundamental growth in excess of 7 percent.
          -Yield protection (and enhancement, in most cases).
          -Superior relationship of total return to p/e paid.
          -No cyclical exposure without compensating p/e multiple.
          -Solid companies in growing fields.
          -Strong fundamental case.

John Neff was known as the ultimate value investor.  His short list of principles stated above guided him towards purchasing beaten down, out of favor, dividend paying companies with growth potential.  We have so often talked about buying “Great Companies at Cheap Prices.”  Although the quantitative factors we use in our selection process are different from Mr. Neff’s, our philosophy is similar.   Placing our clients first at all times.  Investing side by side with our clients.  Owning shares of financially sound, dividend paying companies with solid growth potential.  Buying at a low price.  We are honored to include Mr. Neff as one of our most important mentors.  

Until next time,

Kendall