Kellogg grad named among ‘world’s greatest investors’

9/29/2009 - For nearly two decades, Kellogg MBA Joel Tillinghast's intensive research and value perspective have enabled him to outperform investment gurus like Warren Buffett while positively crushing the S&P 500.

A dollar entrusted to Tillinghast's Low-Priced Stock Fund in December 1989, when he launched the portfolio at Fidelity Investments, grew to nearly $16 by December 2006. That's about $4 more than Buffett's financial wizardry produced over the same time and $12 more than the S&P index.

Widely recognized for his financial acumen, the Kellogg grad’s expertise was recently highlighted in a SmartMoney feature on “the world’s greatest investors.” The magazine’s July 2009 edition noted that Tillinghast’s fund had outpaced the broader market by 9 percent during the first half of the year, in part because of his team’s penchant for thorough research that identifies under-the-radar winners.

Tillinghast's advice for would-be market mavens? Understand a business before studying its numbers, since doing so helps determine why a company should be profitable and can "separate luck and temporary success from lasting success factors." Tillinghast '83 recommends digging deep for intel in addition to reading the annual report before meeting top management.

"Does management directly address tough issues or identify growth opportunities? If they're not forthcoming in the report, that may be how they present themselves [in person]," he says. Too many photos of the management team could indicate executives who are "egomaniacs." Conversely, no real indication of leadership could mean the firm is "a faceless company," which presents its own set of problems.

Meeting with management before making an investment is critical, says the Kellogg graduate, who began his finance career in 1980 as an equity analyst with Value Line Investment Survey before going to Drexel Burnham Lambert from 1982 to 1986 when he joined Fidelity.

A disciple of Peter Lynch, legendary former manager of Fidelity's Magellan Fund, Tillinghast prefers a low-turnover approach to his portfolio, which is broadly diversified and composed almost entirely of stocks priced at $35 or under. This strategy requires him to select investments carefully and be prepared to hold them for years.

"I would lose my mind if I had to move investments as frequently as some people do," says Tillinghast, whose $22 billion fund today includes about 800 firms. "I tend to ease in and ease out."

Morningstar, the investment research company, has called Tillinghast "a diligent, bottom-up stock picker [who] pays little attention to market indices or macroeconomic trends," but who nevertheless knows how to find undervalued equities that often can increase earnings even during inclement economic weather. Such qualities earned the Kellogg alumnus MarketWatch's "Stockpicker of the Decade" honor in 2007 and “Domestic Stock Fund Manager of the Year” in 2002.

Among the insights Tillinghast shared with Kellogg students during a visit to the school as a guest lecturer in the Asset Management Program:

• Friends, nonfinancial publications, plant and store visits and compulsive curiosity bring insights you don't get from a CFO;
• React to trends not yet reflected in analytical models;
• Focus on companies that have very high returns on equity for decades;
• Look for barriers to entry that keep returns high;
• Seek out information that is not obvious or already priced into the stock.

Deliberative and soft-spoken, Tillinghast, 51, grows animated when the topic of questionable accounting practices or inadequate banking transparency arise. "I'm not a fan of present-value accounting, taking a gain on a security that you've not yet sold and converted to cash," he says.

The finance major recalls some memorable Kellogg experiences: marketing classes with Professor Philip Kotler; an investment banking class taught by Professor John Roberson; a course on business and its environment with Professor Lawrence Lavengood.

"Investment ties together a lot of business aspects," says Tillinghast. "You shouldn't just do finance, though that's obviously helpful."

Kellogg Finance Professor Robert Korajczyk calls Tillinghast's track record "amazing."

"His approach is very Kellogg-like," says Korajczyk, "in the sense that he believes good portfolio managers need to understand the whole business and competitive environment of the firm — strategy, marketing, managerial culture, in addition to being able to dissect the financial statements."