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their selectivity, had defined themselves even while the bubble was in full bloom. They knew enough to steer clear of Enron and the like, despite

being sorely punished as investors cashed out. Eveillard’s response to the French bank that owned his management company in early 2000 and was

pressuring him to go with the market flow, says it all: “I would rather lose half my shareholders than lose half my shareholders’ money.”72

Value investing has a certain cachet, but obviously some so-called value managers merely “talked the talk” and then bolted as their

investors began to cash in their chips during the New Economy years. Our group, and the other “true-blue” value funds that stayed the course,

should be seen as a challenge. A definitive group? No, a challenging group. Take a look.

Value funds are a quite discrete segment. Not so for the second gap in the scholarly endeavor, which might be defined as the failure to

examine the institutional structures and forces that account, so to speak, for the other 95% of the professionally managed money. Funds trade at

cyclonic speeds, turning over their swollen lists of stocks on average every ten months. The transaction and tax costs of all this short-term trading

are huge – huge, that is, for the investor, not the manager. Was anything much happening in the economy, or were the funds simply tilting with

each new breeze in the market? In 2003 , there were 30 days when the S&P 500 and the Dow Jones Industrial Average rose or declined by more

than 2%.73 In the first nine months of 2004, there was not a single such day, and even for the period as a whole those indexes barely budged.

Given the apparent lack of major developments, did the pace of trading drop off? Of course not.[????]

One strongly suspects that much of the explanation lies in the changed structure of the industry. Historically, the structure was easy to

grasp, and at Pacific Financial Research it still is. The firm manages the Clipper Fund, one of the Goldfarb Ten, and also some private accounts.

That’s it. The Clipper Fund gets the benefit of all the good ideas that Gipson and his colleagues come up with. It doesn’t matter what the industry.

They don’t spend part of the day working for this fund and part for another, or transfer from time to time some of their best talent from one group to

another. Clipper gets it all. (Clipper, of course, is just one such example.) As one scans the roughly 2000 domestic equity funds, it is striking how

many firms slice and dice their family of funds into tiny segments designed to catch each new whim of the market, thus allowing investors to

switch money from an emerging technology fund to a discovery fund, to a growth fund, all within a single fund family. How will Mrs. Jones, who

has two kids and works at WalMart, know how or when to do this? If she or her employer have selected the Fidelity group, she will find equity and

bond funds in over 200 different flavors. For many of them she’s not eligible, but how is she to know? Obviously, she requires a financial adviser,

courtesy of her local bank or brokerage firm, who in turn needs to look useful by doing lots of switches. Don’t ask; the all-in costs are huge.

These families of funds have grown exponentially since managers discovered that they could capture the capitalized value of their fees,

either by taking the management firm itself public or by selling it to a conglomerate of fund families, such as Franklin Templeton. And once the

management firm’s stock is publicly traded it no longer has the privilege of ignoring market trends, however frothy, if it means that investors will


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